Harvard economist Sachs warns Ukraine to get moving on budget

by Marta Kolomayets

KYIV - Ukraine's economic crisis will worsen if it does not adopt a budget and an economic reform plan within the next few weeks, cautioned a Western economist who currently serves as a consultant to the Ukrainian government.

During a press conference on April 19, Harvard economist Jeffrey Sachs said, "It is quite critical that the budget and these reform proposals be considered in the nearest future. The situation will only get worse unless this country is able to adopt a realistic budget and realistic reform proposals in taxation and deregulation." Prof. Sachs over the past decade has advised the governments of Bolivia, Poland and Russia, and last year turned his attention to Ukraine.

Prof. Sachs, director of the Harvard Institute for International Development, whose work in Ukraine is funded by the U.S. Agency for International Develop-ment, arrived in Kyiv for a four-day visit to meet with Ukrainian government officials, including Vice Prime Minister Serhii Tyhypko, Economics Minister Yuriy Yekhanurov, National Bank of Ukraine Chairman Viktor Yuschenko, deputies of the Verkhovna Rada and representatives of Western organizations working in Ukraine.

"If the reform proposals and budget cannot be adopted in some form soon, the flow of international money will stop, or even reverse, and the current financial crisis, which is already terrible enough, will only get worse," he said, explaining that Ukraine depends on an inflow of international money right now to keep moving.

Budget is crucial

On April 23 Vice Prime Minister Tyhypko submitted a list of International Monetary Fund conditions to the Verkhovna Rada that Ukraine must meet if it is to get a $3 billion credit package from this Western organization. Priorities on that list include the passage of a 1997 budget and approval of tax reform laws.

Although there has been talk that the 1997 budget may be passed by the Parliament in the second reading by as early as April 25, other components of the economic reform package, such as tax law changes and proposals on market reforms and deregulation, still have to be examined by Ukraine's legislative body.

Mr. Sachs advised Ukrainian officials that they "should work every day, around the clock," until a budget is passed and the economy starts moving again. [However, this advice may go unheeded; the Cabinet of Ministers just last week passed a decree, designating the days from April 26 to May 4 as days off, due to Easter Monday and International Labor Day, which fall on April 28 and May 1 respectively.]

Ukraine's government and Parliament have been stalled over budget and reform plans since November 1996, when the government introduced a package of draft laws, known as "Economic Growth '97." They were introduced by Victor Pynzenyk, the former vice prime minister who resigned less than a month ago because he said the government of Prime Minister Pavlo Lazarenko lacked the "political will" to implement reforms.

"The next few weeks will tell" (whether government officials have the political will), commented Mr. Sachs. "But, I am very disappointed in how long it has taken to even make a budget," he added.

"The waiting game is very dangerous for the country. I don't want to be a prophet of doom, but even worse things, believe it or not, can happen in an economy like this," he said.

Given the fact that parliamentary elections are scheduled for March of next year and campaigning may begin as early as October of this year, it is of the utmost importance to start moving on economic reform legislation, he noted, explaining that the political timetable is becoming more and more complicated every day. "Once new elections come up, the time and the chance are lost," he said.

Trying to instill some measure of hope, Prof. Sachs assured reporters that it still is possible to reach agreements quickly on the major pieces of legislation, and on that basis it would be possible to reach agreements with the International Monetary Fund, the World Bank and Western governments on further financial support. As an example, he cited the situation he observed in Poland in 1989, when 11 major pieces of legislation were passed in just a couple of weeks.

"This legislation was the base that helped Poland become the fastest growing country in Europe in the early 1990s," he noted.

Prof. Sachs, who serves as an advisor on macro-economic issues for the countries of Latin America, Eastern Europe, the former Soviet Union and Asia, said that there is still a chance to put a brake on this "very, very, very serious crisis and to start some kind of recovery."

More minuses than pluses

He noted that the economic situation in Ukraine was terrible last year and this year it is terrible as well, with no real progress being made in this sphere. Although inflation was down, the economy saw a further decline with non-payment of wages, a budget that does not work and an economy that keeps plunging deeper and deeper into the black market.

Foreign investors did not get any incentives to invest in Ukraine and Ukraine did not increase exports; thus, there were no substantial changes in the Ukrainian economy over the last year, he explained.

"The only positive event was the introduction of the national currency, which was successful," Prof. Sachs continued. But, Ukraine continues to lose international confidence every day that a budget is not adopted, he added.

He explained that the budget would have to be realistic, as for many years Ukraine was steered by an unrealistic budget -- the government promised more than it could deliver and promised to collect more revenues that it actually collected. Thus, realistic tax laws are needed and realistic taxes need to be implemented - taxes that would not eat up a person's entire income and would decrease the amount of tax evasion. In turn, more taxes would be collected and more wage arrears could be paid, he commented.

"I meet more firms leaving Ukraine than going into Ukraine right now," he said. "It is impossible to do business deals in this city [Kyiv] because of the bribes, because of the taxes and because of the insecurity of property," he said.

Although Prof. Sachs is still keeping his fingers crossed regarding Ukraine's future economic growth, Ukraine's citizens are not very optimistic. In a poll published two weeks ago by the newspaper Den, 34.8 percent of Ukrainian citizens surveyed, said that the economy is collapsing; 32.8 percent said an illusion has been created that some kind of reforms are going on; and 31.2 percent said the reforms are not progressing actively enough, while only 1.3 percent said reforms were active.

Marta Kolomayets is press officer of the U.S. Agency for International Development based in Kyiv.

Copyright © The Ukrainian Weekly, May 4, 1997, No. 18, Vol. LXV

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