Battle of capitalisms

The word combination “unpopular reforms” is again haunting Ukraine, as it was during the prime ministership and then the presidency of Leonid Kuchma. Moreover, it looks like the general public has somewhat got used to it, and participants in various TV shows can readily answer the question of which of the current politicians will carry out these reforms in Ukraine better, faster, and more effectively than the others.

In other words, unpopular reforms are becoming (or have already become) popular. All the more so that the economic situation is in fact rather difficult and tends to deteriorate – so, willy-nilly, it needs some unconventional approaches.

And society has been lulled into believing that, without unpopular reforms, it will be much worse than it is now, for there may occur a default, a catastrophe, an economic collapse, a political disintegration of the state, and a loss of foreign markets… So, to paraphrase a Brezhnev-era maxim, let there be unpopular reforms but not a war.

In realty, Ukrainian-style “unpopular reforms” have so far meant nothing but a war against the people, the country, the prospects of its development, and in fact the entire civilization, but not what is usually meant by these two words in a crisis-ridden economy. What is the essence of these reforms, in brief?

Firstly, it means essential cuts in public spending in order to establish a rigid budgetary discipline. The cuts are not mechanistic – they are supposed to be meaningful, effective, and, depending on the situation, temporary or permanent.

Secondly, it means sharply increasing corruption control, taking the economy out of the shadow, encouraging and forcing people to pay taxes.

Thirdly, it means stimulating hired workers and businessmen to work more (by way of, among other things, raising the retirement age) and invest free funds in, above all, the expansion of production facilities.

Fourthly, it means promoting the growth of export and, at the same time, of the domestic market by efforts of the national commodity producer.

Fifthly, it often presupposes a considerable (but not runaway) devaluation of the national currency aimed at boosting exports and activating money circulation.

Naturally, this is not an exhaustive set of measures, but even this list is sufficient.

That these reforms are unpopular is quite clear – even such a measure as corruption control, which in theory is supposed to be supported by almost the entire society, becomes irritating and unpleasant for many, when it begins to be implemented. There are examples galore. Georgia has in fact wiped out corruption in traffic police. So what? Many are dissatisfied: look, I have drunk a little wine, so is it the reason why I should pay an exorbitant fine or even had my license withdrawn for some time? Earlier, all I had to do was grease the policeman’s palm, and now… Still more dissatisfied are intellectuals: earlier, Associate Professor N could phone Full Professor S and say: look, my nephew is applying to your college, please look after the boy, and my kickback is a cinch. Now all these associate and full professors can no longer wield a clout, and President Saakashvili faces opposition from many prominent intellectuals and artists whose names now mean nothing in the deals that are by no means confined to Georgians only.

And taking the economy out of the black area? Again, almost everybody agrees, but one will have to pay taxes, sometimes heavy ones, on all the money earned. And even if the market is fully captured by national commodity producers, many people will not benefit from this because they feed off the import and sales of foreign-made goods; nor is it a benefit for powerful foreign companies.

Yet reforms of this kind work well on the whole if the aim is not only to restore the economy’s financial health in a short time but also to restructure and modernize it at least partially.

In Ukraine, however, the so-called unpopular reforms had entirely different consequences – perhaps because they were aimed at a wrong direction and carried out in a wrong way by wrong people. One could add “and in a wrong country,” but this would have been utterly pessimistic, although it would have contained a grain of truth.

Pension and wages delays (sometimes for years on end) during the premiership of Pavlo Lazarenko and Valerii Pustovoitenko, ruination of the social infrastructure, degradation of many, cultural, research and educational institutions (as a result of public spending cuts), “grabatization” of state property for a song by future oligarchs (and totally ludicrous privatization certificate for the general public) plus elimination of most high-technology production facilities, transition of 60 percent of the economy into the black area, “shadowization” of about 60 percent of the economy, an abrupt fall in the domestic market capacity, a galloping inflation which turned into a hyperinflation in 1993, a fall in the number of incentives for high-skilled productive work, and corruption at all levels.

Naturally, a command administrative economy did give way to a market economy as a result of the reforms carried out under Kuchma, but, firstly, some experts believe that this transition occurred contrary, rather than owing, to many actions of the then government; secondly, this transition resulted in the establishment in Ukraine of an oligarchic (clan-oligarchic) capitalism, the least effective variety of capitalism. This capitalism also showed the domination of comprador capital oriented not to Ukrainian national interests but to links with the former parent country, including readiness to play a subordinate role on both the domestic and foreign arenas.

In the view of a number of Western experts, oligarchic capitalism is the least effective, economically and socially, variety of present-day capitalism, which Ukrainians have already felt themselves.

THERE ARE MANY VARIETIES OF CAPITALISM, UKRAINIAN BEING THE WORST

Noted Western experts William Baumol, Robert Litan, and Carl Schramm analyze which variety of capitalism has the best prospects. They say there are four types of modern-day capitalism – oligarchic, state-directed, big-firm, and entrepreneurial.

Oligarchic capitalism is characterized as the most primitive of all not only because of a very wide gap between a bunch of the rich and the wretched mass of the people but also because oligarchs (including those in Ukraine) are after their own profits and boundless enrichment rather than economic growth. This system of capitalism is typical, according to the aforesaid researchers, of Latin America, the Middle East, and Africa. As for state-directed capitalism, the experts believe it is objectively more characteristic of South-East Asia, where public administration successfully opts for the best Western technologies and production patterns but runs the risk of mistaking the further choice and wasting money in the existing sectors of a market economy, which in fact occurred during the late 1990s Asian crisis.

According to Baumol, Litan, and Schramm, in its pursuit of high profits in the 1980s, the big-firm capitalism of Western Europe and Japan failed to fully match the increased US productivity level and get itself ready for the information technology boom in the early 1990s. The experts also think that one of the flaws of big-firm capitalism in the West is excessive bureaucratization of the economy, when the leadership is afraid of the risks of the development and commercialization of radical innovative decisions which considerably broaden the limits of production and result in a qualitative acceleration of productivity and economic growth.

In the experts’ opinion, entrepreneurial capitalism is the one that serves best to broaden the horizons of production by way of bold and radical innovations. But the existence of such industrial giants as Boeing, Ford, or General Motors is not sufficient for success – what is needed is qualitatively new firms with the most radical innovative approaches in the application of both new state-of-the-art technologies and new organizational forms of production. So the aforesaid Western experts believe that what can produce the best results is a reasonable combination of big-firm and entrepreneurial capitalisms. They also warn that it is important for state-directed capitalism in such countries as Russia, China, and India not to miss the moment of switching to more high-quality “blends of good capitalism.”

So what about Ukrainian capitalism in this context?

As of the mid-2000s, this capitalism displayed a number of eloquent features. On the one hand, there were rather high rates of economic growth (which were, however, extremely uneven in different sectors, and this did not allow most of the high-tech industries to rise after the crisis-ridden 1990s) and increased exports. On the other hand, the share of wages in the GDP was one of the lowest in the world. For instance, in 2005, although Ukraine saw a 41-percent rise in the wages and salaries fund in comparison with the previous year (a spin-off of the Orange Revolution), the shares of remuneration expenditures in the GDP and in the product cost were only 27 and 18 percent, respectively, whereas they accounted for an average 50-65 and 30-35 percent in European countries.

This situation is quite natural, for the new owners and the government behaved in Ukraine like a horde of invaders. Former British Prime Minister John Major once said that if there were a Nobel Prize for the adroit robbery of a country, it would be undoubtedly awarded to Ukrainian oligarchs. It will be recalled that, according to the US publication Stratfor, a now well-known Ukrainian oligarch amassed about nine billion dollars through the Bank of New York in 1998 alone. Another fact: Israel set up a special police squad to inquire into investments from Ukraine and Russia, which reached almost 20 billion dollars in the late 1990s and thus posed a threat to that country’s national security. After the situation improved a little as a result of the Orange Revolution, about a half of the economy is again “in the shadow” today.

The experts also assessed that about 40 billion dollars were smuggled out of Ukraine during the presidency of Leonid Kuchma. The attempts of some officials to combat the total robbery of the country and corruption always resulted in them being dismissed. Today, Ukrainian oligarchs belong to Europe’s richest people, while Ukraine is the last country in Europe in terms of wages and social security. The middle class, which is the principal motive force in North American and European societies, has been driven off the fringe: 90 percent of the Ukrainian national wealth belongs to 10 percent of the population and, at a closer examination, this wealth is practically concentrated in the hands of a few hundred families. The impression is that occasional inflation upsurges and bankruptcies of core banks is the result of not the spontaneous market process but of the deliberate actions of governmental and oligarchic circles aimed at thwarting the creation of a real middle class (not the one defined on the basis of subjective feelings) which would account for at least 20-25 percent of the Ukrainian population and be a serious economic and political force.

At the same time, we can see a glaring disparity between the property and real estate boom among most of the Ukrainian governmental officials and what they state in their tax declarations. A Verkhovna Rada member’s salary looks like a pittance when you see the car or cars they drive or the cell phones they have, not to mention posh manors or country retreats. More often than not, only the phone of a people’s deputy is worth two or three of their yearly parliamentary salaries. This did not emerge today: as long as ten years ago an expert assessed the price of the cars on which MPs and ministers arrived at a ceremonial meeting – it was far more than a billion hryvnias. So the word combination “golden billion” has an additional meaning in Ukraine.

As Saint Augustine used to say, “In the absence of justice, what is sovereignty but organized robbery?”

It is therefore worthwhile to get back to the question of “unpopular reforms.”

This time they are to be carried out by the governmental bodies formed by a political force supported by almost all millionaires and billionaires in the elections.

In other words, it is about the oligarchs who are holding powerful economic, political, organizational, and media-related resources in their hands, about the creators of the current actual political system (not the one enshrined in the Constitution and laws) of Ukraine.

The economic background of these oligarchs’ power is export-oriented low-tech industries, and their educational level (except for two or three of them) is obviously insufficient for understanding the strategic problems of this country’s socioeconomic development.

The point is that in the current crisis situation, “unpopular reforms” ought to be the lever that could change the vector of Ukraine’s development.

A true, not just declarative, economic modernization of Ukraine should be based on renunciation of the leading role of the metallurgical and chemical industries (which, incidentally, put out lowly-processed products) and of the export of unprocessed farming products in favor of producing more sophisticated industrial and agricultural goods for both international and domestic markets. Moreover, let us not forget that industrial facilities in most of the Ukrainian economic sectors are 70-90-percent obsolete or obsolescent, extremely power-consuming, and dependent on Russian energy supplies.

In this situation, there can only be two scenarios of development. The first is Ukraine entering the sphere of Russian influence, all the more so that there are Russia’s agents among the Ukrainian oligarchs, which will create a belt of post-Soviet state-directed and oligarchic-capitalism countries with Russia in the center. The other is Ukraine restoring its financial health and implementig the big-firm and entrepreneurial capitalist model without any hasty and radical breach of the existing relations but with the state making greater investments in the key industries, effectively supporting the middle class, and showing concrete intentions to strengthen civil society.

Obviously, the latter option presupposes a positive role of the WTO, European and other Western investments, and the future EU free trade area. The latter option is better for the Ukrainian people, for it opens up a prospect of what Winston Churchill once called “approaching the equitable distribution of benefits,” in which big-firm and entrepreneurial capitalisms have accumulated by far the greatest positive experience.

But will oligarchs agree to essentially restrict their own consumption (of almost exclusively imported goods) in favor of major investments in modernizing the economy, which will pay off not so soon? Is it in their interests to have the Ukrainian mass-scale solvent buyer, i.e., the consumer of medium and small business products? Will they take at least one step towards suppressing corruption in the top echelons of power if everything was based on the opposite principles there until now?

These are in fact easy-to-answer rhetorical questions.

Therefore, “unpopular reforms” in Ukraine are most likely to boil down to a two-to-threefold price rise for household gas, curtailing social programs, reducing the already negligible funding of research, education and medicine, which will have disastrous consequences, and to increased unemployment. In addition, retirement age may be increased by two or three years. And all this will be coupled with budgetary infusions into the “real economy,” i.e., the oligarchs themselves.

Will this produce the results which the reform initiators are counting on? There are serious doubts. For example, 47 percent of men and 39 percent of women in Luhansk Oblast do not live until the retirement age even now. An almost similar situation exists throughout Ukraine. Should the retirement age be raised by two or three years, we will see that more than a half of men will not live to be in this age and, in general, this age will equal the men’s average life expectancy, i.e., 62-63 years. Psychologically, this will result in the mood “I will not live long enough in any case, so why should I refuse to take some money now?” In other words, this means “shadowization” of a large part of wages and an essential reduction of Pension Fund allocations.

And a two- or even threefold rise in household gas price? What will the authorities do if they face mass-scale non-payments? Will they encourage the suppliers to cut off the gas that goes to consumers? Will they turn a blind eye to this, as they are doing today, when tens of thousands of apartment owners in Kyiv alone have staggering years-long public utility arrears – and nobody can either force them to pay the debts or evict them for fear of a wide-scale social conflict?

Ukrainians are already paying worse than before for housing and the public utilities. For example, in January 2010 only 69.9 percent of the charges were paid for, with total arrears increasing by 11.1 percent. Particularly, in Dnipropetrovsk Oblast and Sevastopol only a little more than half the population are paying: obviously, should the rates be further raised, only a minority of residents will be paying and the overall amount of payments will be still lower than before. It is also clear that such scenarios are impossible without tough police measures (and, accordingly, mass-scale anti-governmental protests) – not in the least because there are high-placed and well-off individuals among persistent non-payers, which is common knowledge thanks to the media, and ordinary people are sure that these individuals will go on flouting general rules.

And, in general, why should the authorities try to overcome the crisis by making ordinary people and medium and small-scale business shoulder a heavier fiscal burden? For example, when Franklin Delano Roosevelt was the New York State governor, he levied an essential tax on luxury. This really helped tens of thousands of the state’s impoverished residents to earn public works wages and Roosevelt himself to become soon the US president. But it is highly doubtful whether a measure like this is possible at all in Ukraine – suffice it to recall that parliament refused to limit pensions, for this would have affected the MPs themselves and their “dear friends.” Nor was the Verkhovna Rada willing to impose a special tax on real estate, even if the latter is 500 sq. m. in area, which is luxury under the current circumstances because an average Ukrainian family has approximately a ten-times-smaller floorage.

Therefore, if the plans of “unpopular reforms” succeed without any changes in Ukraine’s socioeconomic development model, the poor will be still poorer, the rich still richer, the middle class will go on eking out a miserable existence, and more and more people, especially young ones, will be looking for a job abroad. What will be the final result of such “reforms?” The initiators of the latter seem to be answering this question as follows: “This will suffice us.” Will it really? And will facelift-type unpopular measures, which a part of the general public has tacitly accepted (“You can’t escape fate”), be able to revitalize the Ukrainian economy? Or will this cover up our diseases instead of curing them? This also seems to be a rhetorical question.

After all, Baumol, Litan, and Schramm claim that a transition from oligarchic to effective capitalism may require something like a revolution (preferably, a peaceful one) in order to chance the elites which do not consider their country’s wellbeing a top priority.