Lanovoy analyzes Kuchma's first moves as P.M. (02/07/93)

Lanovoy analyzes Kuchma's first moves as P.M.

The interview below with Volodymyr Lanovoy, former deputy prime minister and minister of the economy of Ukraine, was conducted by IntelNews on January 31. Mr. Lanovoy now is director of the Center for Economic Reform in Ukraine, a non-governmental research organization that studies and provides forecasts of the political and economic climate in the country.

Q: As you know, the Center for Economic Reform in Ukraine prepared a program for Ukraine's emergence from the economic crisis which the Cabinet of Ministers used to develop its own program. Could you comment on the effectiveness of the government's most recent measures as they relate to Ukraine's current socio-economic climate?

A: According to our center's findings, the Kuchma government correctly assessed the areas that need fixing. However, there are substantial shortcomings in the government's plan: rather than form a coordinated foundation for economic stabilization, they have created a system that is not fully inter-connected.

This is partly the result of insufficiently prepared government documents designed to regulate the implementation of reform measures. As far as I know, about 80 percent of government documents are ratified by the Cabinet of Ministers in their first reading. Only a few are returned for review. This is the reason for the poor quality of the program's final draft. I agree that our government does not have a well-defined formula for preparing these legal documents. They have not adequately determined which documents are capable of promoting social or economic processes and which need to be reworked.

Q: What do you think about the decree limiting entrepreneurial activity?

A: There is no logic or effectiveness in the government's program on privatization and development of the non-government sector of the economy. A good illustration of this is the government's attempt to further centralize many of the administrative functions in the areas of management, distribution and trade. As in the past, taxes on intermediary activity are being raised.

In general, intermediaries have fallen into disfavor with Kuchma's Cabinet. If our goal is to abandon the centralized system of supply and distribution, we must form a new decentralized system of intermediaries. It is natural that enterprises with hundreds of suppliers and customers require assistance in handling transactions. But, for some reason, intermediary activity is considered less important than production, and therefore many obstacles are purposely placed in their path.

As for decrees transferring control of state ownership to ministries, I consider them inappropriate. Let's assume that an enterprise owing someone money is unable to meet a payment deadline. Someone has to pay the money. If not the enterprise, then why not the state? The funds must come from the state budget or through National Bank credits. This will fuel inflation, devalue our currency and intensify the crisis.

Government enterprises must be able to enter into financial and trade arrangements with other economic structures, using their own assets as security. Enterprise managers must be allowed to finance these agreements through long-term bond or stock issues, which can be freely traded. Only then can we begin stabilizing the financial system. If we don't do this, we will once again be slapped with a 500 billion karbovantsi debt between banks and enterprises in Ukraine. We have spent too much time talking about external debt, but no one seems to care about eliminating our internal debt.

The same can be said for privatization, which has received no fresh impetus to stimulate its progress. Our government seems perfectly satisfied with the mechanism in effect last year: the creation of privatization accounts and bureaucratically centralized mechanisms formed to identify the objectives and conditions for privatization. In my opinion a different approach must be taken, new types of stimuli must be introduced. Unfortunately, this is not happening.

Q: How do you view the decree lowering the value-added tax from 28 to 20 percent? This decree also removes tax breaks for joint ventures with foreign capital, which previously were given a five-year reprieve from taxes, as specified in the law on foreign investments.

A: This is a political question. I think the state must guarantee businessmen the right to legally operate on its territory. Of course, the state's integrity depends on stable conditions for business and the stability and competence of legislation. The impact of the recent change to this law, which originally favored foreigners, will be felt for a long time. I think this change to the law will increase the fears of foreign businessmen and discourage them from investing in the Ukrainian market.

Q: Do you feel Prime Minister Leonid Kuchma's government lacks political foresight? Many political and economic observers in Kyyiv believe that raising prices before the New Year, just before the important Ukrainian-Russian meeting in Moscow, was a badly timed step?

A: I think all these problems are due to the absence of a well-defined plan of action. I don't think there will be any benefits from the price increases. Small-scale privatization should have been implemented first and its success somehow guaranteed during the first two to three months. Then prices would have stabilized because of a balance between supply and demand. And then the next administrative freeing of prices would definitely become the last. But, because it has no program, the government has violated the order in which the reform process should have proceeded.

Q: Do you believe President Leonid Kravchuk will sacrifice Mr. Kuchma just as he dumped Vitold Fokin in the event of a battle in Parliament over the government's effectiveness?

A: Given the current circumstances, Parliament will not dare recall the government. However, it is not inconceivable that attempts will be made to put the government "in its place" or to intimidate it. Parliament does not support Kuchma's dethronement because it is afraid of the responsibility that will fall on its shoulders. Our Parliament is totally useless: it does no work and won't allow others to do anything. And it refuses to shoulder any responsibility.

Which is why the prime minister's position is firmly entrenched. I think he will not bow to Parliamentary pressure, although, ideally, everything should be different, since all reforms must proceed under the aegis of legislative power.

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