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Tough Medicine Needed For Ukraine's Economic Woes

Volodymyr Lanovy
The economic crisis in Ukraine has become a reality: enterprises are halting production, bank branches are going into liquidation, employees are being laid off. It is hard to remember that as recently as three months ago economic-development indicators were steadily rising. One has the impression the country has been swept up in an unexpected tsunami.

The metaphor is apt, even though to a considerable extent the crisis crept into the homes of average Ukrainians bit by bit. In the first half of this year, interest rates soared and the hitherto stable value of the hryvnya was shaken. Investments in the economy dried up, and the construction sector slowed down.

But an economic tsunami did roll over us from the outside. And its effects were hard felt in Ukraine, a country that is neither among the high-technology countries of the West nor among the oil-and-gas giants of the East. Like most countries in the world, Ukraine is between the former and the latter and seems to have been hit from both sides.

First, Ukraine -- like all the other countries of the world -- has become an unwilling financial donor to a void that opened up in the United States. The outflow of capital from our country has resulted in a catastrophic plunge of the stock-market indexes and an abrupt decapitalization of Ukrainian enterprises. By contrast, the U.S. markets have seemed virtually stable.

Second, Ukraine -- like many Western countries -- was vulnerable because the economy had been weakened by inflated global prices for oil and gas. Before the crisis struck, Ukraine was de facto a major contributor to the Stabilization Fund in Russia. Kyiv had no opportunity to build up its own reserves like Russia, many Persian Gulf energy producers, China, and other countries were able to do. Now those countries have funds to provide assistance to their own banks and companies and even to offer credit to Western countries. Ukraine is left to compete with other countries for help from the International Monetary Fund or to cope on its own.

Third, Ukraine's economy was relatively weak even before the crisis struck. It is already in its second year of a rapidly rising trade deficit and a negative hard-currency-payments balance. This situation meant that the halt of foreign-capital inflows brought on by the crisis has struck the national currency hard, producing a sharp decline in production and consumption.

Fourth, the slowdown of commodities markets abroad means a decrease in orders for Ukrainian industrial and agricultural products, decreases in the prices for key exports, and sharp losses for major enterprises.

Major Reform Needed

Clearly, Ukraine's recovery plan must extend beyond merely addressing the immediate effects of the crisis. Ukraine must not only cover financial deficits and credits, but it must also recover the position of its enterprises on global markets and ensure that production is sufficient for domestic demand. A recovery program should include both immediate, extraordinary measures to counter various financial implosions and a complex of structural and institutional reforms, without which we will be unable to compete in today's globalized and pitiless world.

Over the long term, global economics will come down to a struggle among countries for a share in the global investment flow. Therefore, it is essential that our national anticrisis program include reforms that will make Ukraine a worthy competitor in this struggle.

Ukraine must improve its hard-currency, credit, and investment markets. They must be deregulated, transparent, accessible to everyone globally, and protected against administrative interventions.

It must implement far-reaching tax reform to reduce corporate and individual taxes, while also introducing mandatory contributions to the state's pension, insurance, and environmental funds. It should impose taxes on real estate and the consumption of energy and natural resources.

Kyiv must reform the stock exchange to protect the rights of minority shareholders, mandate transparency in corporate accounting and reporting, and introduce online trading. It must create investment banks and encourage public share offerings. It must adopt a broad program of demonopolization and credible antimonopoly regulation.

It must introduce market-oriented reforms of key sectors that remain under state control: the fuel and energy complex, agriculture, machine building, transport, road management, telecommunications, housing and utilities, and others. The country must also face the fact that its management system is shortsighted, cumbersome, onerous, and inefficient.

Yes, there is work to be done.

Volodymyr Lanovy was Ukraine's economy minister and first deputy prime minister in 1992 and head of the State Property Fund in 1997-98. The views expressed in this commentary are the author's own and do not necessarily reflect those of RFE/RL

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