Morningstar says Kuchma-Gore Commission will focus on Ukraine's economic problems (05/11/97)

Morningstar says Kuchma-Gore Commission will focus on Ukraine's economic problems

by Yaro Bihun
Special to The Ukrainian Weekly

WASHINGTON - The visit to Washington by President Leonid Kuchma on May 14-16 and the meeting of the Kuchma-Gore Binational Commission will focus a lot of attention on Ukraine's economic problems, according to President Bill Clinton's adviser on aid to the newly independent states of the former Soviet Union.

Ambassador Richard Morningstar, who also advises the secretary of state on these issues, recently returned from a fact-finding mission in Kyiv. He discussed Ukraine's economic problems - as well as its accomplishments - on May 5 at the Meridian International Center.

"Ukraine is very much at a crossroads," he told a large, primarily business audience that included 43 Ukrainian bankers, MBA professors and students from Ukraine.

"I think that those meetings will be very important in defining our relationship and our strategic partnership," he said. Ukraine has been under a lot of pressure in the United States and in Europe - in the media, in the Congress "and to some extent within the administration here in Washington" for its worsening investment climate, corruption and slowness in implementing economic reforms.

Mr. Morningstar said that it's in the interests of both Ukraine and the United States that Ukraine "develop as an independent, stable, market democracy." And the greatest threat to that end is a lack of economic growth, he said. "It's one thing to achieve macroeconomic stabilization, but that doesn't necessarily translate into economic growth.

"And, if Ukraine cannot establish over the next several years a clear pattern of economic growth," he cautioned, "there's a tremendous risk, I think, to the stability of Ukraine." Ukraine needs to develop an investment climate that will foster economic growth, Mr. Morningstar said.

That was part of the message he brought to Ukraine during his last visit in April and it will form the basis of the economic talks during the Kuchma-Gore Commission meeting in Washington.

Ambassador Morningstar listed some of the points of that message.

Investment disputes involving American companies, as well as other foreign and Ukrainian investors, must be resolved. "It is increasingly reported to us by American businesspeople that doing business in Ukraine is actually becoming more and more difficult," he said. "And it's not just corruption," he said. "It's a very, very difficult bureaucracy to deal with and very difficult laws to deal with as well."

"It's very important that these investment disputes get solved, because even if they are exaggerated in the newspapers, they have developed such a life of their own that, until they are solved, American investors are going to be much less likely to go to Ukraine," he added.

Ukraine agreed with international financial institutions and bilateral partners like the United States that it would enact a very bold reform package. While there has been some limited success, Mr. Morningstar said, a lot more needs to be done in order to get International Monetary Fund and World Bank funding and to develop a good investment climate. He noted, on the positive side, that the Verkhovna Rada had passed a new value-added tax, that a new corporate tax has had a second reading, and that the government has filed a new, revised budget.

Ambassador Morningstar said it was very important not only that all of these measures pass, but that the package also include:

a significant reduction in the payroll tax, which at 52 percent is keeping companies from returning from the shadow into the formal economy;
deregulation - eliminating the chances of corruption by decreasing the number of people in the bureaucracy, the number of required licenses and registrations that a business has to obtain;
and the elimination of the so-called "kartoteka." (He asked, "How can you run a market economy if the government can dictate where bank accounts are going to be directed?")

Mr. Morningstar stressed that Ukraine must pay attention to some other important areas if it does not want to lose the assistance of international financial institutions. Agriculture is one such key area. Unfortunately, he added, reform in agriculture "is going backwards, and not forward." He noted, "It was almost incredible to see the decree that Prime Minister Pavlo Lazarenko issued establishing a new parastatal 'Agrotechnologia,' which would encompass Khlib Ukrayiny and also the chemical and equipment monopolies that already have been established."

"It's not surprising that there would be issues such as grain embargoes if the state sector controls the whole grain industry," he said. According to Mr. Morningstar, Prime Minister Lazarenko had promised that these parastatals would be broken up, that 200 of the 300 grain elevators would be privatized and that the state order for grain would be reduced.

"It's important that these actions take place," he said, adding that the methods for achieving these ends and the levels of state grain orders must be made clear. Otherwise, he cautioned, not only will the development of the private sector be retarded, but Ukraine would stand to lose a World Bank agricultural adjustment loan - a loss of about $200 million of budget support for the government of Ukraine.

The U.S. official also pointed to a major problem area in the energy markets. When the World Bank agreed to the energy sector loan for Ukraine, he said, the collection rates were to be increased from their level of around 85 percent (25-30 percent in cash collections). Instead the collection rates have gone down to 40-60 percent (8 percent cash collection). Mr. Morningstar said he suspects that during the winter months - which are more difficult for collections than summer months - the government has been letting the large industries "off the hook" in their payments for energy.

As in the case of agriculture, backsliding in the energy sector has other ramifications besides a negative effect on that sector's development, he said. If Ukraine does not come through with necessary changes by July 1, $240 million in undisbursed World Bank loans "could disappear," he said, "and they're critical to the development of the energy sector."

The third problem area, Mr. Morningstar said, is in medium- and large-scale privatization in Ukraine, the rate and transparency of which must be improved. He cited a counterproductive move by the Verkhovna Rada, which passed a law allowing citizens to cash in compensation certificates for amounts that, if all of the certificates were turned in, would be 10 times greater than the national budget.

As a result, instead of using their certificates for privatizing enterprises, he said, Ukrainians are holding on to them "in the hope that there is some sort of magical pot at end of some rainbow that the Rada has promised."

Mr. Morningstar stressed that one should not judge Ukraine by looking only at the negative side, and he listed an impressive positive side of the ledger:

Ukraine is a politically stable society, which held free elections, has a very good human rights record and enacted a new Constitution;
it completed the dismantlement of the third largest nuclear arsenal in the world and has worked successfully with Western partners, as in the peacekeeping duties in Bosnia;
its annual inflation rate is down to 25 percent; its discount rate on government bills has dropped from 40 percent to 25 percent and some 85 percent of small businesses have been privatized.

"What's happening in Ukraine and has happened in Ukraine has really been quite remarkable - that after all of these hundreds of years of Ukrainian history and Ukrainian culture there is an opportunity today for there to be a strong and independent nation of Ukraine.

"And it seems to me that it's an obligation for all of us not to let that opportunity vanish because all of us - Americans, their Ukrainian partners and friends and the government of Ukraine - are not willing to face the very difficult issues.

"So I raise these issues not to be negative about Ukraine, but to spur all of us on to work towards and make the decisions to make Ukraine a strong, economically prosperous country," Mr. Morningstar said. "But these issues need to be addressed," he added.

The evening discussion, sponsored by The Washington Group, the U.S. Agency for International Development and the Barents Group, also included an analysis of banking in Ukraine by the Kyiv International Management Institute M.B.A. students.

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