Oleksandr Klymenko Official website
Articles | 559 | 18.01.2016

Is Ukraine not Mongolia? Or where can european market and free advice of IMF lead Ukraine to

January 1, 2016 Ukrainians (even perhaps without understanding) woke up in the new economic reality. An agreement on free trade zone between Ukraine and the European Union came into force on the first day of the new year. Meanwhile the similar agreement with Russia was bilaterally suspended. Moreover, the Russian party has imposed a trade embargo on products from our country.

Current situation is unique. It generates both the new opportunities and new risks for Ukraine. Depending on how adequately we use the first and neutralize the second, we will obtain relevant result: either the growth of the national economy and the welfare of each Ukrainian or total loss of economic and, as a result, state sovereignty.

So what will FTA with the EU bring to Ukrainian government and business, how will it influence on ordinary Ukrainians? Is it a new way for our country, or, on the contrary, it is the beginning of its end? What are the options for Ukraine and whether we are ready to use it?

MYTH BREAKING FOR UKRAINIANS

Unfortunately, we are Ukrainians, who have always been characterized by unmotivated positive expectations concerning relations with Europe. Alas, plethora of them are baseless. Let’s move to details.

Expectations.  cheap European goods and products for Ukrainian consumers

Reality. A significant drop in prices for basic imported European goods should not be expected.

Firstly, import duties will be canceled not for all shipments from Europe, but only for 70% of the nomenclature. Secondly, the potential depreciation due to the cancellation fees by 5-15% will be leveled by the devaluation of the hryvnia.

European products are initially more expensive, which means that not every Ukrainian consumer can afford it. At the same time, cheaper products and Russian goods, which are familiar to Ukrainians, including food, cosmetics, household chemicals, which came under the sanctions, will also disappear.

Expectation: the opportunity to travel cheaply over the Europe

Reality. Firstly, the probability of visa-free regime with the EU is very low for Ukraine. Secondly, the majority of citizens can not afford even tourism in Ukraine.

The cancellation of visas in not enough for Ukrainians in order to travel over the Europe. The cost of travel in the EU will become cheaper by 35 euros. However, the citizens of Ukraine will still have to prove their ability to pay – 45 euros per day per person, as well as providing an extensive list of documents (not to the consulate, but at the border). You will also need to spend money on biometric passport.

However, it is not the most important thing. Visa-free regime will no longer lead to tourism, but to the migration of young people with higher education, who were not provided by the conditions for normal work by state. For this reason, nowadays, depending on the season, from 5 to 8 million Ukrainian citizens (so-called migrant workers) live and work abroad. Removing of visa barriers will lead to an outflow of the most valuable thing in Ukraine – a loss of human capital.

Expectation: new job places for Ukrainians

Reality. Some European and international companies really can move to Ukraine.

However, it is necessary to note: first of all, Belarus (for instance) is more attractive for investors due to the war and political instability in Ukraine, drops of national currency, constant “surprises” in tax system and other factors.

Nowadays, this country quite successfully removes economic “cream” in current situation. It comes about the growth of air transportation due to the prohibition of direct flights between Ukraine and Russia, the sale of goods (came under reciprocal sanctions) through its territory.

Secondly, even if some production is moved to Ukraine, it will refer to that part, which requires unskilled labor. Moreover, it will not lead to significant economic growth. According to the laws of economics, if there is a significant difference in salaries, the world market immediately will consign all economic activities, which are a dead end (in terms of technology) and require unskilled labor to the countries with low wages. Thus, in this context, Ukraine – it is only an option for European entrepreneurs to save on labor force. It does not come about any investment in technology development and innovations.

Erik Steenfeldt Reinert – outstanding Norwegian economist – told about a bright instance in this context. Production of the world’s best balls for baseball (the national sport of the US) moved from America to Haiti, Honduras and Costa Rica. There they sew it manually, since it is impossible to mechanize their production. Accordingly, there is no need for the modernization of production, development of services and infrastructure. Salary of the worker in Haiti is 30 cents/hour. Moreover, they can not expect for its increasing in future. Each employee is able to produce only four balls during an hour (there are nearly 180 stitches per ball). The price of one ball in USA in $ 15. At the same time, golf balls, on the contrary, is technologically advanced product. There is the important role of scientific research. This product is produced in the United States. The salary of the workers is $ 14-16 per hour. Different wages in these industrial sectors – manufacturing balls for baseball and golf – is a direct consequence of uneven technological development.

Why are we talking about this instance? In addition, there are nearly 17 million unemployed citizens in Europe. Consequently, it will hardly move high-tech production, which can give a powerful push to the development of entire industries, to Ukraine.

There is only one possible consolation for the Ukrainians. Due to the relocation of European manufacturers, national legislation can be amended by European regulations on governing working conditions. Thus, our workers will be better protected. However, the instance of Haitian producers of baseballs suggests otherwise:  baseball players in the United States do not care about occupational diseases of the workers, who produce these balls. It comes about the rigid law of the free market. Ukraine is a butterfly on fire for so many years.

On the other hand, we should expect for coming wave of shortenings in industrial sectors, which were oriented to Russia before or can not compete with European producers. First of all, it comes about mechanical engineering, in particular, coal mining machinery – this sub-sector has been affected by the war in Donbas and non-procurement in Russia. In addition, metallurgy and chemical industry are under threat. It is necessary to realize that there is a serious challenge, namely, creation of new workplaces, in eastern and northern regions of Ukraine

Expectation: new opportunities for Ukrainian business in the European markets

Reality. Yes, the European market is 10 times more than the Russian one. Eurozone – it is € 14 trillion of total GDP and half a billion of potential consumers. However, if Ukraine had adjusted communications with the Russia, it would have to create brand new with the EU.

There is no doubts that those companies are already present in the European market will get a profit from FTZ with the EU. The rest of them are expected to go through the long, complicated and bureaucratic process of certification of its production and goods in accordance with European standards.

Ukrainian business still is not able to demonstrate success in this field. Thus, in January-October 2015, when the EU opened the borders for our products, the flow of goods from Ukraine to European countries has not increased. Moreover, in terms of money it has fallen by 28% – to $ 10.5 billion.

We have to understand and learn that the EU is in a crisis. It opens its borders not for supply of our products, but for supply their products to us. We are “involved” into the oversaturated market – in the economic area, where there is an excess of products and fierce competition for the consumer. Our enterprises have to switch its production to EU standards in order to get into this field. It means to be involved into technological dependence on their equipment and requirements. The state does not help, but also increases the tax and regulatory burden on the Ukrainian producer.

Expectation: the growth of Ukrainian economy and welfare of the citizens

Reality. Neither country in the world could not get rich on the supply of food products abroad under the condition of the absence of their own industrial sector. Deindustrialized poor countries are lured by the possibility of free exporting of agricultural products to Europe and the United States, and forget about the development of their own industry.

Nowadays, the same situation takes place in Ukraine. The export of Ukrainian agricultural production in Europe has increased five times for 10 years. Let’s see what we have exported to Europe during the past year? Basically it comes about commodities – metals ($ 2.4 billion), iron ore ($ 870 million), sunflower oil ($ 800 million), cereals ($ 1.3 billion), honey ($ 100 million). At the same time, the EU imports high-tech products with high added value.

Unfortunately, we should not expect for the «reforms» due to the government operations, which are carried out under the dictation of the IMF.

Are there any notes about creation of conditions for the restoring and modernization of the Ukrainian industry (the industry that can compete with European and American ones) in the recipes of the IMF? On the contrary, it comes about increasing the tax burden, the pressure on the labor force by raising tariffs, lower wages, lack of competitiveness of Ukrainian products.

I have repeatedly written about the harmfulness of the IMF pieces of advice for Ukraine. Mongolia instance clearly demonstrates it.   This country, which is outside the free market, was building up a diversified industrial sector by slow, but confident steps during 50 years. The share of agriculture in GDP has declined steadily, dropping from 60% in 1940 to 16% in the mid-1980s. Half a century of efforts had been destroyed during four years (from 1991 to 1995), while Mongolia was the best «pupil» of the World Bank and IMF among the former communist countries. It was opened to free international trade. It was industrial country, which has degraded to the level of pastoral. Ecological, economic and human catastrophe have occurred there contemporaneously.

Why do we accept advice of “experts” from Harvard without any doubts? They know about the real economic situation in Ukraine as much as each of us knows about the life at the bottom of the Marianas Trench. It is not a secret that the IMF experts simply change the name of the state in their presentations, when they offer a “recipe rescue” for the countries of the so-called third world, (unfortunately, including Ukraine). It will not be surprising if you notice Ecuador instead of Ukraine.

Why are we ready to trust the IMF? Why do we believe that the international organizations, which were established and are serving the interests of our competitors in the world market, care about our future? About the future of our children?

It’s time to understand and admit the obvious thing: more developed economy needs a market for its products and purveyor of cheap raw materials for high-tech industries. Nobody keeps company due to pity or sympathy in a global world! National interests and pragmatic economic calculation define all things. We are Ukrainians, who guided in our policy by subjective emotions of the moment.

Our politicians like to appeal to the fact that the IMF offers a “Marshall Plan” for Ukraine. However, let’s be honest: “The Marshall Plan” was about the re-industrialization of the German economy, which was destroyed after the war. It was not just about inflating the countries by money, which (in the case of Ukraine) should be returned to a creditor, and settle in the form of rents in the pockets of corrupt officials.

In XIX century Americans as a colony of England (the metropolis attempted to ban its own production and turn it into an exporter of raw materials) said: “Do not follow the advice of the English, follow their instance”.

Nowadays, the best advice for Ukraine: “Do not follow the advice of the Americans, follow their instance”.

If we do not understand and do not realize, if we just do not respond the challenges of the time, our country will gradually lose its industry and the most skilled and innovative employees.

ON THE VERGE OF GLOBAL CHALLENGES

Nowadays, the world is on the verge of the new global challenges with rapid changes. Ukraine has not the most powerful positions in these changes.

American analytical company Stratfor made an interesting prediction. Although, I believe that in case of this company, the point of view is defined by point of seat. At least, part of the forecast looks quite logical and realistic.

According to the forecast, the EU has entered into a crisis. It is not able to resolve it. Its intensity continues to grow. Experts believe that the European Union will never return to its former unity. If it survives, it will exist in be more limited and fragmented form during the next decade.

While we reckon on a free European market, Europeans will only intensify protectionist measures, which operate in European economy in areas such as agriculture. In future it will complement trade barriers, which are created by weak Southern European countries in need of restoring national economy after the current depression.

European exports will face more intense competition and extremely unstable demand. Expected economic downturn in Germany will lead to internal social and political crisis and weaken the influence of this country to Europe over the next 10 years.

Poland, which was supporting an impressive growth during this period, can become the center of economic growth and rising political influence. Meanwhile Poland is diversifying its foreign trade, it will eventually become the dominant force of the East European Plain. Moreover, it will expand its geopolitical appetites, including Ukraine.

Taking into account this perspective, we have to understand: Europe needs Ukraine more than Ukraine needs Europe. Our hands make people, who are interested in our weakness, more powerful.

WHAT IS THE PATH FOR UKRAINE?

If we are guided by the logic of common sense and think about the future of the state of Ukraine, we must not appoint the perpetrators, not find out the reasons for our defeats, but unite and work together, look for the sources of our future victories, points of growth for our economy, for the development of our state.

Nowadays, there is a unique economic situation, which has occurred in Ukraine due to the will of foreign players. We must use it for our own benefit.

We have two or three years, while raw material supply to the European market is profitable. We must not repeat the mistakes of 2008-2010, when the money from the raw metal just has been “eaten away” and displayed at the offshore.

Firstly, we have to correct fiscal policy in order to do it. It comes about the transfer of the tax burden on natural resource industries and creation of the most favorable climate for the manufacturing of the third and fourth cycles, high-tech industries, energy-efficient and innovative technologies.

Secondly, we should define the points of growth for our industry and provide them with maximum protection and state support.

Moreover, we have to determine it objectively (not on the basis of external advice and our own “wishes”. Yes, we can declare our aim, for instance, the launch of nanotechnologies.

However, if we return to the notorious instance of Mongolia: outstanding American economist in his recipe for this country stated that information technologies are the main growth point of the development. It is great. However, he forgot to take into account that only 4% of the population in Mongolia (besides the capital) had an access to electricity!

In this context, the instance of Japan can be really useful for Ukraine. It has risen after the Second World War with the help of the development model, called “flying geese”. Its essence is that poor countries can improve their technology, jumping from one product to the next one increasing the knowledge intensity. Many years ago, Japan started to produce cheap clothes and achieved such productivity, which has dramatically raised the standard of living in the country. Thus, it was unprofitable to produce clothes anymore. The production has moved to South Korea and then – to Taiwan, Thailand, Malaysia and Vietnam. Meanwhile, Japan began to develop the production of television sets, and then – robotics. When you learn how to walk, you can not just run a hundred-meter race. First of all, you have to take the first step.

Thirdly, we should protect and develop intellectual potential of our nation, invest into talent, ideas, innovations, rebuild our educational system under the labor market, the needs and perspectives of the innovation economy.

We can support a stable welfare of the state only with the help of constant innovations. The global economy reminds “Alice in Wonderland”, where it is “necessary to run as fast as you can in order not to stay in one place.” Those countries, which are constantly investing in innovation, are on the top positions of well-being.

When the world has invented a versatile car (which will leave the Tesla behind in few years), we have no possibility to upgrade “Bogdan” and repair roads in Ukraine.

Fourthly, Ukraine should not reduce salaries and pensions (in fact, it is done by the devaluation of the national currency), but rather raise it, stimulating consumer demand. When Henry Ford just started his business, there were no  special demand on his cars. What did he do? He raised workers’ wages. His contemporaries were in perplexity.  However, he has formed the paying customers of his own products, which have conquered the whole world and turned the structure of the economy upside down. Increase in demand, rather than savings on consumer spending can give a boost to the Ukrainian economy.

However, those people, who have proclaimed themselves as the Ukrainian authorities, do not understand it (or they understand it, but they do not work for the good of Ukraine).

That is why today we, Ukrainians, have to understand that we have a unique opportunity for the development of national production, creation of our own, not borrowed formula for success. Nowadays, all of us, citizens of Ukraine, have the opportunity to make the foundation for our future. It comes about the future, where our children will live in.

The inefficiency and unprofessional authorities, corruption, which eat away all the good intentions, and pseudo-patriotism block it off. We run the risk to become Mongolian herders faster than it may seen.

If it is so, we will remain eternally humiliated and insulted, until we are strong!  We can not become strong by waving flags and saying bravura slogans.

We can become strong state, if we construct a strong economy according to our own, Ukrainian recipes. We will achieve it, if we follow our own Ukrainian path.

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