Following in Lukashenka’s Footsteps

15 March 2013, 19:03

An idea has been promoted in the media lately that the current Premier Mykola Azarov and his Soviet economic management should be replaced with “young reformers” appointed by the Family in order to finally enact real reforms. However, these “reformers” have already demonstrated their preference for administrative-command methods. Shortly before former NBU Chair Serhiy Arbuzov joined the Cabinet of Ministers, his NBU team began promoting the notorious project to de-dollarize the economy and stabilize the hryvnia rate at the taxpayers’ expense. There were talks of potential bans of foreign exchange transactions, criminal liability for FX conversion beyond banks, restrictions on FX settlements and the like.  After the shift in the Cabinet that made it more loyal to the Family, the focus on command economy increased compared to that in the previous government. The “State Programme to Intensify Economic Development in 2013-2014” passed by the Cabinet on February 27 nailed it down. Related to Arbuzov’s appointment as Vice Premier, the new programme proves that his style has much more in common with the Soviet system than Azarov’s does. The programme’s priorities make it look like the reformers are set to preserve a Soviet economy and keep it viable manually using Belarus’ experience.

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The document is oriented at objectives quite separate from economic development and the supply of high quality, competitive goods and equipment to commercial consumers. Instead, it mostly focuses on the automatic provision of markets for current enterprises as they are. This means that they will not have to worry about upgrading their production facilities whatsoever. The programme also offers a wide range of government support to help national producers and boost import substitution, from privileges in loan issuance to buying more of their produce.

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The government chose to sell more produce on the domestic market rather than search for ways to restructure the economy, which is currently uncompetitive on the global market. They are interested in modernization solely for the opportunity to increase domestic sales of steel and engineering sector products that are uncompetitive on the world market. “Ukraine needs over 300mn tons of metal products to upgrade and modernize its facilities,” Azarov said proudly as he presented the programme. “So, domestic steelworks may end up with contracts for many years to come.” As a result, though, growing competition on the global market and the need for Ukrainian steelwork holdings to plunge into an exhaustive struggle for international markets will be pushed to the sidelines.

While stating that “many enterprises are uncompetitive even in the domestic market” and “the growing demand for non-food goods is mostly satisfied through imports”, government officials still suggest a number of manual privileges to protect Ukrainian enterprises from competition. These include non-tariff barriers to trade, such as “keeping medical products that do not meet established safety standards off the market”. According to the programme, “the pharmaceutical sector has the potential to become the driver of the country’s economy”. This idea is based on just one fact that “the pharmaceuticals market has grown 3.6 times over the past 10 years”. The drop in the share of 20 Ukrainian pharmaceutical companies to 25.8% is left out of this statement, however. This is hardly surprising as it leaves room for attempts to divide the market manually (read more about the pharmaceutical industry and imports in Ukraine in Pills for the Greedy).

What matters most in the pharmaceutical sector is quality rather than the price. Clearly, no government support would be needed to urge people to buy medicine that is identical in quality to imports, yet at prices several times lower—if such products existed. Instead, the government has been restricting access to good quality imported medications while promoting their domestic versions, which are often worse for patients.

Another priority industry mentioned in the programme is engineering that embraces transportation, aircraft, ship, agricultural machinery and aerospace engineering. The programme lists the “employment of 21% (586,000) of the entire industrial workforce” and “3,500 kinds of machines and equipment” of the sector’s current or potential output capacity as its key features, yet leaves out the sector’s competitiveness or the demand for its products on either the global or domestic market. Ukraine is importing machinery worth tens of billions of dollars, and domestic machinery cannot compete with it. Meanwhile, it exports over half of the total output of its engineering industry, with Russia buying the lion’s share.

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The plan for hi-tech aircraft and aerospace engineering industries is to increase “the production of airplanes in Ukraine to 20 units annually”, “preserve at least 5,000 jobs in the aviation industry and adjacent sectors”, and increase the output of the aerospace industry, now mostly export-oriented, by several million dollars. Meanwhile, questions regarding the developmental capacity and efficiency of these industries without government support remain open. In the current state, they will merely add to the burden on the economy, making real modernization much more challenging.

The key point in the young reformers’ programme to boost the economy is essentially to put the interests of consumers and the prospects of the country aside, while focusing on providing enough orders to all available facilities—quite obsolete by global standards—in the industries controlled by oligarchs.

This resembles the economic policy employed by Belarusian President Alyaksandr Lukashenka for almost two decades now. Indeed, this approach helps maintain a relatively high “gross output” at facilities inherited from the Soviet era. Yet, it also makes the economy woefully uncompetitive.  This explains the government’s initiatives to raise import tariffs for a number of goods, which already put Ukraine on the verge of confrontation with its WTO partners. Thus, despite declarative reforms, the current Ukrainian authorities and big business owners, often typical red directors, will have no real incentives to upgrade their enterprises and compete for consumers.  

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Quite on the contrary, they will find it much easier to garner government support through loans under privileged conditions and public procurement contracts. For this, they will have to remain loyal to the regime and hand over shares of profitable assets to the Family. It is now clear that the authors of the economy-boosting programme are hardly looking ahead to international investors. Given the Belarusian model, this is only for the better as it keeps competitors away. 

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