ENTREPRENEURSHIP: THE WAY OUT OF UKRAINE’S ECONOMIC IMPASSE
By Volodymyr Zviglyanich
Ukraine’s economy remains in a crisis. Industrial production fell by more than 14 percent in January 1998, which brought about a 0.8 percent decline in GDP for January. (1) The virtual stoppage in production and the chronic failure to pay salaries and pensions — especially in the provinces — have exacerbated the political situation in the country. The miners’ strikes and the march of the miners on Kyiv in May-June 1998 showed that, although this time, they did not lead to the government being replaced and early presidential elections as they did in 1994, the “miners’ card” will undoubtedly be played more then once on the threshold of the upcoming presidential elections in October 1999.
And as has been reported in Prism (2), economic stagnation has led to the increased influence of the leftists — the Communists and socialists — in parliament, splitting the parliament virtually in half and paralyzing its work for the many weeks that it took to elect a speaker.
The difficulty of this political moment for Ukraine, according to Zbigniew Brzezinski, is that it must make the transition from an excessively concentrated government to a more open society, one element of which is small and medium-sized business. But unfortunately, as Brzezinski noted, Ukraine today has neither a capable presidential system nor a parliamentary system. Moreover, there is an internal struggle going on between the executive and legislative branches. (3)
The economic situation, according to Leonid Kuchma’s adviser on macroeconomics, Anatoly Halchynsky, has begun to improve. From January to May of this year, GDP rose by 0.1 percent over the same period of the previous year. (4) The tendency of economic growth in Ukraine, which has appeared for the first time since 1989, (5) gives the government reason to hope for GDP to rise by 0.5 percent before the end of the year. This tendency could be strengthened by the development of Ukraine’s production base, and above all — the development of small and medium-sized business.
It is well known that throughout the world, small and medium-sized business is the main taxpayer, accounts for 65 to 80 percent of GDP and about 70 percent of all jobs. In Poland and the Czech Republic, 23 and 37 percent of the work force respectively work in small and medium-sized businesses.
In Ukraine, on the other hand, in 1996, small and medium-sized businesses only accounted for six percent of GDP. They provided employment for only four to five percent of the able-bodied population. As a consequence, the situation got worse, since most enterprises have “gone underground,” i.e., have stopped paying taxes. The “shadow economy” in Ukraine accounts for 50 percent of GDP, or more than 40 billion hryvnyas, on which no one is paying taxes.
To a great degree, the state is responsible for this. It has given small and medium-sized business an incentive to “go underground,” by making it difficult to create new small businesses. According to the World Bank and the IMF’s research in Ukraine, the following bribes (on the average) have to be paid by a small businessman: registering a business — $176; a visit from the fire or health inspector — $42; a visit from the tax inspector — $87; an import license — $278. The enormous state sector is fostering unemployment, the non-payment of salaries and pension, the catastrophic impoverishment of the population and even its physical extinction. (6)
Businesses have to pay more than thirty mandatory taxes. There are over 100 different forms of licensing. Bribes, which, according to one poll, more than 80 percent of businessmen have to pay, are creating an social environment in Ukraine which is hostile to the free market.
The problem is exacerbated by the difficulties in registering a small or medium-sized business. In Kyiv, this costs $1069 and takes three weeks, whereas in Moscow, it only costs $20 and takes one day.
The mass consciousness has an unfavorable view of small and medium-sized businesses. According to a Socis-Gallup poll, 41 percent of those polled had a negative view of businessmen, while only 39 percent viewed them positively. Those who had a negative view associated entrepreneurship with theft and the division of society into rich and poor. According to a study made by the “Democratic Initiatives” fund, only 20.3 percent of those polled saw the need for a complete transition to the market; 24.1 percent were for partial changes. Thirty-eight percent advocated a return to “socialism” as existed before perestroika. Almost forty percent expressed indifference.
On the whole, conservative, anti-market views (or, in the best case, indifference) prevail in Ukraine. The exception is Kyiv, where only eight percent of those polled were hostile toward entrepreneurship. Market transformations have taken place more quickly in the capital than in the country as a whole.
In the opinion of 70 percent of Kyiv residents, entrepreneurship will save the population and the economy. It is instructive that Kyiv residents, who have tasted the benefits of entrepreneurship, see the development of the microeconomics of entrepreneurship — i.e., individual activity — as the way out of the economic crisis. The other thirty percent see salvation as coming from “large” structures, such as the state, the IMF, or the World Bank.
The drama of the present economic moment in Ukraine lies in the clash of two paradigms: paternalism versus individualism. The legacy of socialism in economics and politics is pushing the Ukrainian political elite toward state paternalism, supported, predominantly, by the elderly and those living in the provinces. And this policy is driving the most enterprising individuals either “underground” or into emigration.
As a result, all sides of the socio-political equation end up losing. Ukraine still has not found the path of reasonable coexistence between the state and the individual which is characteristic of developed market democracies. The two sides are waging a cold — and increasingly, even a real — war against each other. The state is trying to stifle the private entrepreneur by excessive taxes, pursuing the illusion of the common good; the private individual lives in an atmosphere of social alienation, considering the state to be something alien to himself, and does not pay it taxes.
As a result, both sides are, in essence, criminalized. The state realizes that it is acting improperly, but continues to adhere to the tactics of social monologue and violent domination. The individual in the “shadow economy” lives in the sphere of “shadow legislation,” or, to put it more simply, within the sphere of action of unwritten traditions, established by members of the “clan,” the “mafia,” and has nothing but contempt for the legal norms obligatory for all.
The criminalization of consciousness and everyday life in Ukraine have therefore reached their extreme expression. This virtually nullifies all of the West’s attempts to introduce private entrepreneurship in Ukraine. These attempts simply sink into the morass of the argument that “that’s just the way we do it, and you foreigners are never going to understand us.”
But only entrepreneurs can save Ukraine. Only they can create the jobs, pay the taxes, offer the services, produce the goods, and try to compete with imported products. They are the only ones who do not put social pressure on the state. (7)
According to the Ukrainian Ministry of Statistics’ figures, a significant part of the balance sheet profit in such sectors as trade and food service (72 percent), customer service (57 percent), and construction (20 percent) is produced by small and medium-sized businesses. But in industry, small and medium-sized businesses account for only four percent — the rest is produced by the “behemoths” of the socialist period.
Statistics show how far Ukraine lags behind its closest neighbors on the path of economic reform. For example, in Poland, entrepreneurial activity is completely supported by the state. Over the last six years, the Polish economy has grown by 3-4 percent per year (1992-1993) and by 6-7 percent from 1994 through 1997. In Ukraine, the economy has declined by 350 percent since 1992. In Poland, GDP per capita increased from $1200 to $3500. In Ukraine, it is approximately $1,000. Total direct foreign investment in Poland amounts to $12 billion; in Ukraine, it is approximately $2 billion. (8) Poland has been accepted into NATO and will soon become a member of the European Union.
Ukraine risks remaining a country of unrealized possibilities, a country with a succession of “reform programs” and leaders, on whom the West will look with compassion, but without understanding. Observing, year after year, how words are not transformed into deeds, the West, on the Ukrainian question, has passed, in my view, through the stages of hope (1991-93), expectation (1994-95), and irritation (1996), to contempt (1997). In turns, it is baffled by, and distrustful of, any promises made by the latest Ukrainian reformers. And as the financial crisis in Russia in June-July 1998 has shown, Ukraine simply cannot survive without Western financial credits, and specifically, without direct foreign investment in the sphere of small and medium-sized business.
In the Ukrainian Cabinet of Ministers’ 1997 program, the creation of small and medium-sized business was declared to be the motive force of social and economic progress. A state structure was even created to develop small and medium-sized business, which, in complete accordance with the logic of societal coercion, has destroyed the very stimuli for creating such business by its corruption and bureaucracy.
So what is the way out of this situation? One way could be the creation of a critical mass of market-oriented people at various levels of society, both in business and in powerful elite structures. Only by making the transition from social domination and compulsion to social dialogue is it possible to achieve the common good. Practical steps must be taken to develop such a dialogue between representatives of the executive and legislative branches of government and representatives of small and medium-sized business. A political party or broad movement is needed, which would express the interests of small and medium-scale businessmen.
In Ukraine, the Liberal-Conservative Party of Ukraine, headed by Leonid Kuchma’s former economic adviser, Oleg Soskin, is trying to fill this role. But expressing the interests of small and medium-scale businessmen is not this party’s main goal: it is subordinated to a political goal — getting into power structures at various levels. Moreover, the party and its leader are under strong pressure from the state apparatus and from Leonid Kuchma personally, due to their opposition to his policies.
The Ukrainian administration thinks that it is the interests of the large state monopolies, (which are united into a quasi-governmental structure — the Union of Ukrainian Industrialists and Entrepreneurs — modeled in the image and likeness of a similar structure in Russia, which is chaired by the former chief of the Industrial Department of the Central Committee of the CPSU, Arkady Volsky) which are worthy of attention. The Ukrainian structure was headed by Leonid Kuchma before he was elected president in 1994, and is now led by his friend Yevgeny Kushnarev.
It is easier to for the administration find understanding among people who, like themselves, were formerly members of the Soviet party and state nomenklatura and are now “Red directors,” than among the little-known and potentially ungovernable representatives of Ukraine’s small and medium-sized business community, who were never members of the nomenklatura. But this does not, however, change the need for state and non-governmental organizations to participate in this dialogue on equal terms. Joint efforts are required to avert the impending economic collapse and Ukraine’s final transformation into a “Third World” country in the center of Europe.
Another crucial task, on which the strategy of entrepreneurship in Ukraine depends, is the choice of economic model. Before the collapse of the Soviet Union, there were three economic models in the world: the planned state-run, militarized economy (the USSR); the open, free-market model, oriented toward universal legal norms of doing business (the West); and the closed market model, with the strong influence of the state, weak formalization and an orientation toward personal ties (the East).
After the collapse of the USSR, the former Soviet states had to choose a model for the future. Many, including some in Ukraine, preferred the Chinese or “Eastern” model, with its paternalism, and state influence on the entrepreneurial, credit and financial systems. Ukrainian reformers were put off by the Western model’s orientation toward laws, the formalization of the entrepreneurial process (job descriptions, resumes, job interviews, etc.) and the transparency of accountability.
In the final analysis, everything is determined by the collection of taxes. The Western model makes tax evasion substantially more difficult, while the Eastern model makes it possible for entrepreneurs to hide from paying them by going “underground,” and for the state to wage war against them, i.e., in essence, to continue the traditional Soviet war between the government and the people, but under new conditions.
The recent collapse of the Eastern economic model, with its closed nature, its paternalism, and informal ties has revealed the philosophical dilemma which Ukraine’s entrepreneurs (and her government) face: they can either try to modify the Eastern model, which will only prolong the economic crisis and repeat other people’s mistakes, or they can finally choose to accept the Western model, with its transparency and its formalization of production relations. Ukraine’s existence as an independent state in the next century depends on which way Ukraine and her growing business structures decide to choose.
1. The Jamestown Foundation Monitor, February 23, 1998
2. See Volodymyr Zviglyanich, “The Communist Victory in the Ukrainian Elections: Will it Change the Course of Politics in the Country?” Prism, Vol.IV, No.11 (May 29, 1998)
3. Zbigniew Brzezinski, “Ukraini potribni reformy. Vy zh poky maete ekonomichni tronoshchi bez reform.” in Den’ [Day], June 6, 1998
4. Kyiv Post, June 12, 1998. This information on economic growth was given to Halchynsky by the Ukrainian State Committee on Statistics. It cannot be confirmed by independent sources, since statistical information in Ukraine can only be collected by government organizations
6. Since 1991, the Ukrainian population has gone down by approximately 1.2 to 1.3 million. See Irene Jarosewich, “Ukraine’s Population Suffers Dramatic Decline in Health,” in The Ukrainian Weekly, 1997, No.34. If this tendency continues, by the beginning of the next century, only 49-48.5 million people will live in Ukraine, which would make demographics one of the most important factors in the country’s national security
7. Vechirnii Kyiv, January 21, 1998, p.2
Volodymyr Zviglyanich is a senior research fellow of the Ukrainian Academy of Sciences’ Institute of Sociology, a research associate at George Washington University, and a Senior Fellow of the Jamestown Foundation.
Translated by Mark Eckert