Yuschenko says gains in economy indicate beginning of growth
by Roman Woronowycz
Kyiv Press Bureau
KYIV - Ukraine's Prime Minister Viktor Yuschenko on March 7 announced the first gains in Ukraine's economy in nearly nine years of independence when he told a group of foreign diplomats that the country's gross domestic product had risen by 3.5 percent in January over the same period during the previous year.
He added that industrial output had risen nearly 5 percent over the last year in the January-February time frame and that the rise in industrial production from January to February was some 10 percent, while the agricultural sector reported a 1.6 percent increase in productivity.
The numbers are the first concrete indicators that - after a decade-long downturn of drastic proportions - the Ukrainian economy finally may be poised for expansion.
"Our economy is beginning to show stable tendencies of growth," explained Mr. Yuschenko.
Since his re-election last November President Leonid Kuchma has taken decisive and long-awaited measures to reform the agricultural sector, cut bureaucracy, complete privatization of the state sector and stimulate the private sector.
Another breakthrough for reforms has been the establishment of a parliamentary majority in the Verkhovna Rada, which has begun to move a logjam of economic bills that were frozen by a previously politically uncooperative legislative body.
Adding to the optimism that is increasingly evident in economic circles is a study released on January 25 by the U.S. Agency for International Development and Ukraine's State Committee for Entrepreneurial Development, which shows that the Ukrainian economy has finally developed a critical mass of small and medium-sized businesses - generally considered a necessity before economic growth begins.
The report, based on a stratified random sample of state data and a survey of 10,000 members of households, established that slightly more than 3 million businesses are currently operating in Ukraine. The overwhelming majority of them, some 2.65 million, are small businesses with a single employee, while only 10,851 employ more than 250 people. The numbers are important because, as the study states, "in most countries small and medium-sized businesses account for anywhere from 50 percent to 90 percent of total employment."
And, in contrast to what is generally believed in the West and in official Ukrainian circles, the survey showed that only 11.6 percent of all employment was in the shadow economy.
First Vice Prime Minister Yurii Yekhanurov said the survey results are encouraging because they show the extent to which the transformation to a free market system finally is taking place in Ukraine.
"We saw a whole different picture than what we receive from official sources," said First Vice Prime Minister Yekhanurov.
Without a doubt, the state is still the largest employer and producer of goods and services. It continues to employee some 6.4 million people, of whom 75.6 percent work in large and often bankrupt enterprises. But the large influx of the self-employed into the business sector shows that the average citizen is taking the initiative and not remaining dependent on the state.
On average, the large firms, most of which were or still are state-owned, tend not to pay their workers regularly and barter for resources and sales, while the newer and smaller companies are leaner, pay employees on time and operate strictly with currency, according to the study.
The government, however, continues to intrude in the marketplace too often, as a large number of state agencies still retain the right to inspect firms and levy fines. Over the years, typical businesses have reported an average of 70 inspections annually. But in the last year that number seems to have dropped precipitously. In the second half of 1999, owners/managers reported receiving only 10.6 inspections. The report explained that this is in part due to a presidential decree delineating how inspectors should proceed, as well as to a change in the approach and strategy used by many regulatory agencies.
Tax system is biggest problem
Surprisingly, when businesses were asked what major problems they faced, state administrative policing came further down the list than had been expected. The overwhelming reply was that the biggest problem is the existing tax system. In Ukraine, unlike most anywhere else in the world, business is literally taxed to death. A general perception exists among businessmen that if a firm adheres strictly to the tax code and does not seek loopholes it will pay some 110 percent of its profits to taxes.
The survey revealed that the system is particularly burdensome for smaller businesses with a few employees, and reasoned that the largest sector that remains in the gray economy, those with one to five employees, does so to avoid the large payments for social security and state medical benefits.
The survey determined, using a hypothetical business so as not to force businessmen to divulge personal information, that about two-thirds of all firms pay less than 50 percent of the taxes due. Nearly 54 percent of the respondents indicated that tax payments of between 21 percent and 30 percent of profit would be acceptable and would not harm the company
The other major problems cited in the report are: a lack of working capital, low market demand for products, legislative conditions, inflation and administrative controls by public agencies.
The report also delved into corruption - a major concern in this country, which is considered to be among the most corrupt in the world.
Again referring to the hypothetical company, the survey revealed that 23.2 percent believed that at least 10 percent of profits must be paid to public officials, while 9.4 percent said that from 21 percent to 40 percent must be paid.
Only about 32.2 percent of respondents said they believed the hypothetical company did not pay bribes. Notably, some 80 percent of the firms that responded to the question on what would be the optimum amount of tax to pay said they could not survive without "informal relations with public officials."
"Tax authorities were named three and a half more times as often as police and approximately twice as often as local authorities," the report noted.
Oleksandra Kuzhel, head of the State Committee on Entrepreneurial Expansion, said the "most unpleasant question pertained to the issue of bribes and corruption."
"A businessman looks at the bottom line. Of course he does not want to pay taxes, but the burden would be less if he didn't have to pay bribes, as well," said Ms. Kuzhel.
While no one here is hiding the fact that large problems remain in Ukraine's business sector, or that a good number of respondents voiced concern that within a year the economy could again be increasingly government-controlled, Ms. Kuzhel took heart in knowing that fully one-third of the respondents who were not currently in private business said that they would like to be in the future - another sign that Ukraine's economic doldrums may be on the wane.
| Employment Size | Number of Firms | Employment | Percent of Firms Registered | Unregistered Employment |
| 0 | 2,651,433 | 2,651,435 | 24.6 | 1,999,180 |
| 1-5 | 148,976 | 516,947 | 37.6 | 322,275 |
| 6-10 | 104,608 | 850,460 | 94.1 | 50,177 |
| 11-50 | 123,757 | 3,189,226 | 99.5 | 15,946 |
| 51-250 | 33,169 | 4,206,444 | 99.5 | 21,032 |
| 250+ | 10,851 | 9,822,542 | 99.4 | 58,935 |
| Total | 3,073,244 | 21,237,054 (52.9 percent of the population age 15 and over) |
2,667,545 (11.6 percent of the population age 15 and over) | |
Table Notes: The numbers for the categories of 0, 1-5, 6-10 and 11-50 size should be added to obtain the total number of small businesses. The numbers for the category of 51-120 employees represent medium-sized businesses. Businesses with 250+ employees are considered to be large businesses. The projected employment data is based on mean employment by size of business based on interviews with registered businesses. Source: U.S. Agency for International Development and Ukraine's State Committee for Entrepreneurial Development. | ||||
SIZE OF BUSINESS | |||
| Problem | Small (0 to 50 employees) |
Medium (51 to 250 employees) |
Large (more than 250 employees) |
| Existing Tax System | 43.9 | 49.8 | 47.4 |
| Lack of Working Capital | 10.1 | 15.4 | 18.3 |
| Low Market Demand for Products | 11.5 | 8 | 6.5 |
| Legislative Conditions | 7.2 | 7.1 | 6.2 |
| Inflation | 8.1 | 2.8 | 3.2 |
| Administrative Controls by Public Agencies | 2.8 | 1.3 | 1.1 |
*Several other problems were identified, such as obtaining credit, interest rates, shortages of raw materials, labor availability and cost, etc., but the very low response rates indicated that these were not significant problems for Ukrainian businesses. Source: U.S. Agency for International Development and Ukraine's State Committee for Entrepreneurial Development. | |||
Copyright © The Ukrainian Weekly, March 12, 2000, No. 11, Vol. LXVIII
| Home Page |