NEWS AND VIEWS: A nation running out of time (09/07/03)

NEWS AND VIEWS

A nation running out of time

by Damian Olesnycky

Ukrainians have a saying, "somehow it will be," that some use in discussing their country's future and its prospects for prosperity. But as it stands today, Ukraine must execute real reforms and become a desirable place in which to do business before the next major upturn in the world economy. Should it not, and should its passive course of policy continue, looming crises will converge and push the struggling country into a period of painful decay.

Since its independence in 1991, Ukraine has not integrated itself into the world economy with any real success. Its trade policies have kept its economy stuck in its region and moving in lockstep with Russia, while its business environment - opaque, intrusive and anti-competitive - has kept investors from rich countries away. Consequently, the people of Ukraine are poor and live short lives. But this is only the start of the country's problems.

Ukraine's population is shrinking fast; it experiences nearly two deaths to every birth and its fertility rate (the average number of children per woman) is tied for lowest in the world. This trend will only accelerate as the post-war generation nears life expectancy, which is 62.7 years for men, 73.5 for women. The United Nations recently projected that by 2050, Ukraine's population will have fallen to 30 million people from its current level of nearly 50 million.

A bigger concern than population shrinkage, however, is the country's long-term demographic make-up. As the projected population thins out over time, so does the proportion of working age people to society's dependents: pensioners and children. The World Bank estimates that by 2050 there will be about two pensioners and three dependents to every four workers. Given that the pension system is already broken, issuing paltry payouts and running major deficits, at a ratio of less than one pensioner to four workers, the status quo is plainly unsustainable. Ukraine is not the only country facing demographic disaster; the rest of Europe and Russia have this problem, too.

Sadly, there is more to fret about. There is an AIDS epidemic brewing - UNAIDS estimates that 1 percent of Ukrainian adults age 15-49 were living with HIV/AIDS at the end of 2001 - and other diseases are on the rise as well. The country's infrastructure is old and falling apart, public services have disappeared, and utilities are in need of refurbishment. Food prices have risen dramatically this summer and are projected to remain high due to fears of a poor agricultural harvest. And, although Ukraine currently boasts a budget surplus, that could change fairly soon with increased government spending and the proportion of pensioners growing.

These coming crises, as daunting as they may sound, can be remedied through greater economic liberalism. In the post-Soviet era, countries that successfully integrated themselves into the world economy have seen the lives of their citizens improve markedly. The World Bank's 2002 report "Globalization, Growth and Poverty," points out that "globalized" countries, meaning the ones that opened their economies to trade and foreign investment, experienced much faster GDP (gross domestic product) and income growth per head than both "unglobalized" and even existing rich countries in the period from 1990 to 2001. The study also shows that in the globalized countries, among them India, China and Hungary, there have been great improvements in life expectancy, infant mortality rates and schooling.

The world economy remains in a lull right now, with Foreign Direct Investment (FDI) inflows to developing countries at their lowest levels since 1996. When the world economy picks up, however, businesses of the rich world will resume investing in countries of opportunity to boost profits, gain labor force flexibility and foster creativity. One can expect FDI to continue spouting the enduring springs of prosperity as it has so often in the past. The examples are everywhere: the software and service empires of India, the biotechnology research institutes of Southeast Asia and the countless manufacturing centers of China, just to name a few.

Many good things start happening for a country when it attracts healthy levels of FDI, and Ukraine - one of the lowest FDI recipients in Central and Eastern Europe - is certainly in need of good things. The workforce could use the better jobs, skills and wages ushered in by globalized workplaces. Non-oligarchic entrepreneurship could take off, as it tends to from friendlier, globalized business environments. As corrupt and ineffectual as the government is, all would likely benefit if its budgets on the federal, regional and local levels were significantly bigger. One could even argue that closer economic ties lead to closer political ones, as is the case now with China standing clear of America's Iraq policy and actually assisting in the North Korean crisis.

Ukraine undoubtedly has the potential to be a globalization success story. Loaded with intellectual capital, the country boasts a literacy rate higher than those of the United States and the European Union, a workforce rich in technical expertise, and a strong proportion of people with post-secondary degrees. Its low price levels and cost of living make it a true bargain. It is also a land of many natural resources, a sizable population and excellent geographical position (on the doorstep of the EU to-be). And unlike countries like Israel, India and South Korea, Ukraine's geopolitical situation is stable, with no terrorism problem or hostile armies massed on its borders.

Ukraine can globalize its economy and address its problems only though major reforms, of which several stand out as the most necessary. Firstly, the many legal channels of government intrusion into business activities need to be closed, and contracts, not least those of international investors, must be honored in all cases. New versions of the civil and commercial codes that go into effect on January 1, 2004, are meant to address these concerns. This legislation could improve Ukraine's business environment, but it is not without flaws and loopholes. According to Edilberto L. Segura, chief economist and director of the Kyiv Office at the SigmaBleyzer investment bank, "On a number of topics, the Civil Code and Commercial Code are inconsistent between themselves as they provide for regulations in different ways. ... These inconsistencies should be resolved before the codes become effective."

Enforcement of such legislation is another issue. Will the courts step up to ensure property and minority shareholder rights, as well as laws against strong-arming and other anti-competitive practices? Too often in the past, Ukrainian courts have handed out verdicts to the highest bidder.

Another reform critical to Ukraine is an overhaul of the tax code. For a country with such a large shadow economy, more sensible tax laws (featuring lower rates) mean not only more money in taxpayers' pockets, but increased government revenues as well. Russia has proven this since its tax modernization two years ago. Ukraine has made some progress on this front, having cleaned up and reduced corporate taxation earlier this year, as well as enacting a low, flat income tax that goes into effect next year. To keep the progress going, Ukraine must fully enact the comprehensive set of tax reforms the Parliament was crafting before taking summer break.

Ukraine also needs more progress on the international trade front. It must pursue more free trade agreements and under no circumstances allow its planned common economic space with Russia, Belarus and Kazakstan to derail its EU integration efforts. WTO membership should be Ukraine's economic focus internationally.

There is much work to be done in other equally important areas. Pensions must migrate to a pay-as-you-go system. Privatizations need to keep boosting government revenues. Politicians have to spend more in areas like health care and infrastructure. Increased aid is not the answer to Ukraine's problems; according to The Economist, it is already the world's 24th biggest recipient of bilateral and multilateral aid.

Yet the picture hasn't been so bleak lately. Ukraine has posted robust GDP and FDI growth so far this year. The World Bank and IMF have praised the country's efforts and initiatives to reform. Credit rating agencies and other financial institutions have upgraded Ukraine's credit rating to favorable statuses. The hryvnia, the national currency, has remained relatively stable for the last few years.

So where to now? Look no further than the presidential election scheduled for next year. The current regime is looking to retain its grip on power by canceling the election and turning the presidency into a position elected by Parliament, where the president's allies hold a slim majority. It is crucial that these constitutional changes be defeated in Parliament and that a proven reformer like Viktor Yushchenko, who brought the country hope and progress as prime minister, carries the day in 2004.

Ukraine is running out of time; will the next half-decade be a time of change and betterment? Somehow it has to be.

Damian Olesnycky, a Ukrainian American, is a graduate of Carnegie Mellon University and is currently employed as an analyst for a major global management consultancy. He has studied abroad in both Ukraine and Russia, and plans to study international business and finance in graduate school.

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