Shanhina Liudmyla Director for Social Programs at the Ukrainian ‘Razumkov’ Centre for Economic and Political Studies

An Extra Pair of Hands

23 December 2011, 12:00

The model of Ukraine’s national economy is definitely one of a kind. It manages to stay competitive largely thanks to the country’s cheap labour force. This economy needs no qualified professionals or new technological sectors at all!

One would hardly risk describing it as industrial, let alone a more developed post-industrial one. No wonder that no employer will volunteer to properly raise salaries for his staff given the fact that its cheap labour force is the key advantage in Ukraine’s economy. And this is perfectly fine with the government who was responsible for building and cementing this model and is still exploiting it today. The biggest profits here have always been churned into the industries that are technological outsiders, such as the iron and steel industry, petro-chemistry, the mining industry and so on. Earlier, the 52-million population used to be just enough to service this sort of economy. Currently, it needs only 46 million. As the recession deepens, the number will go down to 35 million. All in all Ukraine has essentially ended up caught in a vicious circle of 30-50 families whose interests are protected by the government and most of the population work for their benefit in one way or another.  

The crisis we are currently experiencing is not the first one. Ukraine is a post-socialist European country where the post-transformational crisis lasted the longest, from 1991 through 1999, compared to all other FSU states where it ended around 1994-1996. Moreover, Ukraine’s crisis was the deepest of all considering the country lost 65% of its GDP compared to 1990. No other European country had ever faced a GDP decline so sharp. Still, Ukraine has not yet learned its lesson. Ever since Ukraine’s economic growth began in 2000, it has mostly been exploiting its plants, equipment and technologies inherited from the USSR, and of course the cheap labour force. 10 years should have been enough to give a quality upgrade to the Ukrainian economy, but those in power have wasted time. All the voters hear today is that the situation was better in 2010 compared to 2009 and growth continues in 2011. This might be true on paper, but what about in reality?

Competition for jobs allows employers to cap salaries or increase staff workloads, and not only in heavy industries. Meanwhile, a popular statement is that unemployment is low in Ukraine, i.e. under 9.5% according to the International Labour Organization, and official sources give an even lower figure. Yet, these numbers do not cover massive hidden unemployment, such as forced vacations, part-time jobs, unofficial work and so on. As a result, the statistics are good for nothing.

The Ukrainian labour force is virtually the cheapest in Europe and its real income is declining every year, while performance is five-six times lower than in Europe. People have no incentives to work effectively and employers are not encouraged to increase efficiency and upgrade equipment. Their priorities include windfall profits and friendly relations with useful officials. The share of payment for labour in the original cost of products is tiny, often below 1%, even for businesses that churn out multimillion dollar profits. This hampers the development of an effective domestic market in Ukraine.

Things are unlikely to change in 2012. 

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