Sun City by 2015: Liberal Version

On April 10, a presentation of the Concept for Economic Development of Ukraine, until 2015, took place. The Concept was developed by the Effective Management Foundation, which was set up and is financially supported by Ukraine’s richest man, Rinat Akhmetov.

This document has long been much talked of and written about, by Mirror Weekly among other publications. This Concept was long-awaited, and referred to in advance as sort of a Marshall Plan for Ukraine first, then as an action plan for the government of Viktor Yanukovych, the responsibility for whose implementation was expected to be taken up by the Party of Regions. It would probably have been so, if not for the early elections that brought Yulia Tymoshenko to power, with her own action plan and perceptions of who should do what, where and when.

Since the Concept is there, it has been submitted to the current government and all interested people as a subject for discussion and, probably, amendments, changes and implementation.

The document, if deeply analyzed, produces a variety of impressions, which, however, could be condensed into two principal ones.

First: if the Concept is considered from the standpoint as frank by its authors, there is almost nothing to discuss. The Concept seems to be professional, sensible and consistent. If those supporting an ideology somewhere to the left of Friedrich Hayek’s cannot accept the principles of consistent economic liberalism, let them not read the document at all.

Second: Since the Concept was “almost ready” in June 2007, it seems to have been subject to alternations of some kind. In any case, it does not look like an election program, which inspires a faint hope for a battle of various sensible programs rather than political party leaders.

The Concept contains a provision which, if picked up as the starting point for discussion would make the whole debate absolutely senseless. But the document was promulgated for public discussion, anyway. So, it should and must be discussed and examined, and not necessarily from the angle of economic liberalism. So let’s consider it in detail.

Impression Number One

The program developed by the Effective Management Foundation was expected to contain at least two principal things. One is a substantiation of what makes “big business” an engine for the country’s economic development, and the other is complex calculations proving that all of the Party of Regions’ social projects are realistic and practicable.

But this is not the case. The authors from the Effective Management Foundation didn’t find it necessary to explain anything about “big business” or its role as a driving force behind economic development, apparently in the belief that everybody understands everything, and those who don’t should once again read the works of Leonid Kuchma. As for complex calculations supporting practicability of social programs, not only does the document not contain any such calculations, but it even makes no mention of social initiatives at all.

The Concept calls for a set of reforms in three key areas: the building of a foundation for a free-market economy; the creation of a favored environment for business development, and further expansion and development of individual strategic industries underlying the entire national economy. That’s the lot!

Those who expected anything else should have listened attentively to a speech by the Effective Management Foundation President N.Izosimova, who, during her inauguration ceremony for the Foundation, spelled out in explicit terms what that entity would concentrate on, with emphasis placed on economic development issues. So, it’s no wonder that we obtained a concept focusing on economic development rather than social-economic development issues, and those who thought otherwise expected too much.

For all that, solutions as proposed by the Concept are all right, sensible and familiar. Furthermore, much of what it is proposed there has long been embodied in numerous laws, decrees and other binding documents.

Hardly anybody would dare to argue against the need for creating transparent and fair markets for land and real estate and, before introducing such markets, for dividing public lands from municipal lands, and building up a publicly-accessible electronic unified national registry of land and real property ownership rights, the more so because, under several laws, including the Fundamental Law, such measures should have been implemented heaven knows how many years ago.

Who on earth would dare to argue against the need to relieve the pressure on labor compensation funds, introduce a consolidated social tax or to reform a host of compulsory social insurance funds—measures proposed one year ago and even eight years ago? Nobody!

Who will question the need and feasibility to set things in order in economy-related legislation and the economic courts, in the state property management system or natural monopoly activities? For apparent reasons, nobody.

The authors of the Concept precluded any possible speculation about the novelty of their ideas – for one thing, by frankly admitting that they analyzed and adopted everything they found to be best or appropriate and, second, by expressing their deep appreciation to all who might find anything familiar in the text.

What is particularly familiar and indisputable about the Concept is the declared purposes of the proposed reforms and characteristics of the host of the problems those reforms are intended to settle.

The purpose number one is “a sizeable improvement in the living standards of all citizens of Ukraine”, “the birth of a massive middle class – self-reliant and self-sustained”, and providing for the State an opportunity “to pursue a vigorous social policy”. Who would argue against it?

It is foreseen that sustainable improvement in the level of welfare of the population will be accomplished through sustainable economic development based on an increase in the efficiency of the economy. Again, nothing to discuss or argue.

The list of the outstanding problems as identified by the document is nothing new. All is correct -- from the statement of the tenuous fact that “the rate of inflation is spiraling out of control” to corruption, ever decreasing population and the worn-out state of property assets. As is well known, a correct identification of a problem is as good as half over. But here, as one of my colleagues often says, all is not that apparent. As he puts it, some nuances are there.

Impression number two

The point is that the Concept is projected into 2015, after which it promises a Sun City to us all. Let’s follow the logic of the Concept, which, at first sight, seems irrefutable. So, “The purpose of the Concept is precise economic growth, social development for the entire population and the provision of a sufficient amount of resources for resolving social questions”. Right? The following sentence in the same paragraph reads: “We believe that the role of the State should consist, for one thing, in paving the ground for an increase in the Ukrainian economic ‘cake’ and, for another thing, in providing efficient social security and development for the population by dividing that cake among those who need it most”. Right, again.

Following is an absolutely explicit statement by the authors: “This Concept proposes measures for resolving the first part of that task, specifically increasing the economic “cake”. That’s the lot or, in the words of our President, period. That’s all right. If the Concept is to be considered in terms of “increasing the cake”, it is faultless, indeed. For a cake to be divided, it, as a minimum, has to be there. But what to do with the population as long as the “cake” is being baked by the business?

All would be well but for two circumstances. First: the introductory clause of the Concept terms ‘labor power’ as a ‘factor of production’, which is gratifying by itself. True enough, the context is far less gratifying: “An increase in the cost of factors of production, such as the appreciation of energy resources and salary and wage increases, can in the next few years have a highly adverse effect on the Ukrainian economy’s competitive capability.”

Yes, it can, indeed. But, if appreciation of energy resources is perceived by the authors as fact -- furthermore, they propose measures for overall transition to arm’s length prices of energy resources for all consumers, read labor force, including me as a wage earner -- then wage and salary increases are unacceptable to them in principle.

Such being the case, they should exclude me from the factors of production and include me in the category of those needing social security and government assistance. As it turns out, after 2015 I will not be among the residents of the projected Sun City, because, as the Concept puts it, “…in resolving the other part of the task, emphasis should be placed not on fixing the situation in its current state but, rather, to search for measures to help the people at large better adjust themselves to new economic realities. It is also necessary to make social welfare programs highly effective and goal-oriented -- by targeting the truly needy and, simultaneously, by increasing the amount of government assistance.”

Second: One should not think that the social component is not there in the purely liberal and purely economic Concept. All the social initiatives as proposed by the Concept, if put together, produce the following picture.

The Government is proposed, for one thing, “… to take upon itself, in public, obligations concerning an urgent (before the start of the work to draw up the National Budget Plan 2009) and gradually decrease the relative amount of government transfers in proportion to GDP”. In other words, this means a reduction in the size of welfare payments, subsidies and government assistance. Second, the Concept calls for requirements concerning support for social assets and wage/salary levels to be withdrawn from State property privatization packages. Third, is the introduction of the real estate tax. Fourth, and final, is transition to fair prices of energy resources (natural gas and electricity) for all consumers.

The National Bank is proposed to influence other banks to curb what the Concept terms as “aggressive consumer lending”. I, myself, cannot understand to whom precisely the term “aggressive” refers: me as a borrower or the banks who borrow me money at a yield of 25-97% annually. What seems indisputable is that the term “to curb” refers to borrowers rather than lenders.

Simultaneously, I, as a salary earner, must transition, concurrently with the State, to fair market prices for natural gas and electricity, and also to fair transportation rates (which should, at least, equal the cost of transportation). Additionally, I must undertake to pay the real estate tax (as long as I reside somewhere) and to relieve my employer of part of the tax burden associated with welfare payments by taking them upon myself. Fortunately, the authors, for some reason, stopped short of touching upon housing and public utilities, otherwise I would finally have to pay the full cost of eternally underpaid housing and public utilities.

It would be wrong to say, however, that the liberal State is going to abandon me altogether. The Concept recommends the Government “undertake measures to support shifting of manpower”, to pay subsidies on public utilities for the needy through the social security net rather than regional power/natural gas distribution companies, and even proposes that “…part of the money be saved from improved efficiency of the farm capital grant scheme and subsequent decrease in the value of the grants to be transferred as direct monetary assistance to low-income families”.

To state it in the other words, nobody is going to pay a fair price for my work, either before or after 2015. As is the case today, I will be underpaid for my work, but instead assisted and protected, up to getting direct monetary assistance (incidentally, the term ‘direct monetary assistance’, as far as I know, is alien to the liberal economy concept). This means to say that the ‘economic cake’ will be baked at the social cost, and the Ukrainian economy’s competitive capability (which strives to arise but never succeeds) is going to be achieved at the cost of low priced labor, in that this is the only factor of production for which both my Government and my employer can, with impunity, pay much less than it really costs.

But all is not that bad. Salary increases are provided, indeed, yet not for all but a meager six categories of employees: college and university faculty members (which is long-pending); judges (no comment); State company managers (as a means of ‘encouragement’ and solidifying their ‘motivation’ for work); employees of the National Antimonopoly Committee (precisely those who improve their proficiency level, which will require a “reform of the current remuneration scheme”); and, finally, public sector employees, specifically, medium and high-level managers and specialized experts (“in order to make civil service jobs more competitive on the labor market”).

Let’s stop here and examine this provision in detail. If the average wage in Ukraine (which is known to currently amount to a bit more than $300 per month) is considered ‘competitive’, then civil service jobs are already highly competitive. It’s another matter that the average wage itself is uncompetitive on the market, be it food market, housing market or any other market. If so, talk should be about anything else…

Finally, highly competitive salaries are provided for employees of a national strategic center (which the Concept proposes to be set up) for advancing the State Apparatus reform. The Concept also makes provisions for some increase in the size of wages “in the farming sector” to be accomplished through a rise in labor productivity and “direct monetary assistance”.

That’s it.

The authors don’t seem to be happy about income increases for all other workers, which they consider to be “rising too fast” and therefore responsible for “whipping up inflation”. I, as an expert, could never understand that. One of these days, Finance Minister Mr. Pinzenyk, speaking in a television talk shows, told me in explicit terms that inflation depends upon the balance of demand and supply, and begins to rise once the former outpaces the latter. So, inflation could be curbed by either reducing demand or increasing supply. The question is: why here in my country is inflation invariably fought with by reducing demand, rather than by increasing supply, and why does my ever rising purchasing power never lead to increases in the supply of food products or soft goods?

The third and the last impression

Interestingly, the proposed liberal Concept or the program can actually be implemented in stated terms and reach stated results considering that a lot of politicians are ready to sign under most of its points.

But - There is a “wonderful” statement in the Concept, with which many won’t agree and which should be marked out: “As stated, the Concept goals and tasks are unprecedented. However, the examples of other countries demonstrate that successful implementation of complex development programs is quite realistic if all branches of state power coordinate their work and society controls the course of reforms. Transformations of this kind were successfully carried out by countries whose citizens, government and politicians were jointly responsible for reaching the single goal".

For three years in row now, representative of all branches of state power have demonstrated how “effective” they can coordinate their work. It is funny, but they are actually doing this under public control – if something goes wrong – early elections or referendum.

Concerning joint responsibility for reaching the single goal, there is no responsibility or single goal. Our politicians did everything possible to lose all connection with the citizens except for electoral.

Thus, everything will be alright, everything will remain the same as before…

Almost forgot to thank Rinat Leonydovych. It's a pity that I am not an English queen. If I were a queen, I would dub Rinat Leonydovych… Well, Sir Rinat Akhmetov sounds good. Not worse than Sir Francis Drake.