Director of the Institute of Economic Forecasts of the NAS, Academician of the NAS Volodymyr Heyets answers the questions of the P&T correspondent Petro Kolomiyets

Q: The GDP grew in Ukraine for more than ten percent in January-April. Your colleague, Professor Anatoliy Halchynskiy, considers that it is the onset of the real "economic miracle" in our state. Are you also that optimistic?

A: I'd put it this way: there is a request for that "miracle" to happen, that is, there are many constituents that give grounds to conclude: Ukraine can, under certain internal and external circumstances, be included into the circle of countries, the experience of which in relation to the speed-up development of economy will be studied in the world. But so far it is only a request. If only we could manage it for ten more years!

Q: We already have the fifth year of speed-up development. And we need another decade? But according to the world experience, on average an "economic miracle" lasts for a decade. For example Germany, Italy...

A: The depression was too deep and we lost about half of industrial potential. We spun out in the period of transition. Then there was this upturn, which has been under way for the fifth year now. There aren't many countries, which can maintain such rate of development. But here we must remember, that in Ukraine there already was an "economic miracle", a negative one. I mean the dip of production volumes and hyperinflation, which reached

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all times high in the mid-90s. The world studied this our sad landslide as well. That is we need to run longer now to make the trend irreversible. Then one will be able to have a closer look at this instructive "economic miracle".

Q: And what factors can bring this irreversibility closer?

A: Quite a lot of them. First goes internal and external stability. For five years we did without major shocks in Ukraine, which is good. Despite a couple of scandals, the foreign climate was also favorable for us. The outlook will depend on the outcome of Iraqi affair and oil market prices.

The domestic factor also has its nuances, which show that we have definite potentialities put aside for economic growth. We used only a part of them; I mean resources of renewal, which already work, though not at full power. The investment process got moving forward to support the uptrend. There is a problem of other resources, starting with funds. They are at our disposal already but now we have to make the best choices to use them. Say, the outflow of dollars counts in tens of billions now, a part of which can flow back if there is stability and favorable market. There are also new financial resources.

Q: You mean money transference by Ukrainian workers abroad, and their savings?

A: Yes, the conservative estimation is $5-6bn. We looked into it. Annually it makes a lot of money. We need a way to bring them back? People still do not trust promises and assurances. And with good reason. If we succeeded, we could play lower on the international loans.

There remains the problem of earned savings motivation. It concerns both population, and corporations: it is a good potential financial resource for hiking economy. We must also limit the export of capital and attract money back.

Q: The outflow of capital is to the tune of $40bn, correct?

A: I cannot neither strongly object, nor support. It is hard to trace the outflow of the early 90s. But this sum is something to work with. Therefore legalization of the returned money is our third constituent of financial resources, which can be used for economic development. I believe in it. The fourth way includes external loans for corporate needs. We should be more efficient in it. The fifth constituent comprises direct foreign investments, which will go up anyway. And, of course, the state should not stay aloof. That is, the long-term boost needs serious financial potential.

Q: If we analyze all these sources of financial resources, it may look like Ukraine extricates itself from the slump almost without foreign help. And it seems that foreign investments will come into Ukraine, only if there is a dynamic and prosperous economy. But earlier you mentioned the possibility of "crisis-2005", when the necessity arises to do away with the used and ruined key assets.

A: The issue remains open. And it may be dangerous. We keep reminding, writing, warning. It may hamper our progress. Because key assets replacement takes time, and creation of a new fixed capital is done at one dash. Losers like to lump the blame onto the problems with basic assets.

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Q: In fact, not all of them are losers.

A: That's the case. We must create such economic mechanism, so that a corporate proprietor minds not only his business today, but cares about future, about society and state as well. The government understands it and poses a problem before public authorities and scientific institutions. If we manage it, we will get another, very important source of steady growth.

There is another rent, which also can be obtained to realize various programs and support budgetary process. We estimate it to the tune of UAH20bn, and UAH17-18bn is a certainty. The state controls approximately 20-25 percent, while it could be 70-80 percent according to the western practice. So, there is a good reserve.

Q: By this rent you mean income from public ownership or packages in corporations?

A: I mean ground and natural resources rent. The state does not exercise control it should to. We suffered here the major losses. The situation needs improvement.

Q: Look at the ground rent now: the peasants with their miserable profits will go broke, or won't they?

A: The thing is the peasants never profit from the said ground rent. It should be taken away from appropriators that are mediators. The state taking rent under control can pass it over to those, whom it belongs to. It will economize on resources, which it spends today to support agriculture. Everyone will profit by it, except for mediators, which create nothing, but live with might and main. There are serious government commissions already and discussions in parliament are under way. And we are in on it as well. We hope we'll finally tackle it.

Q: Now, we give a political flavor to it, because it involves top interests among political forces.

A: The more so it needs to be decided. It has an influence upon the short-term prospects of Ukraine. I mean the above thesis: whether the present economic upping will become a steady trend and "economic wonder"?

Q: People would like to know what's what: in line with the world standards our economy is hiking for five years running, while living standards creep along at a snail's pace if any.

A: No wonder. The said investment boom backs the present growth of economy. But the end is nearby. Labor productivity rise should follow. It can be managed only through the adequate increase of the part of wages in the GDP. Here we drag behind the countries, which have working mechanisms of labor motivation. Say, in the developed economies this index makes 58 percent, while here it is about 46 percent. Consequently, there are unexploited resources for wages increase.

But there is one more interesting thing. Today we must use the most part of earnings to pay foreign entities for their proprietorship here, new technology and unfair exchange. It makes over UAH17bn. Under certain conditions it could be used for wage increase depending on labor efficiency. We are net-creditors paying more, than receiving.

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Q: Could you be more precise on these funds?

A: Say, you sell relatively cheap natural resources, and buy high-tech equipment. And so on and so forth...

Q: That is, one snatches larger sum selling Mercedes, than tons of metal?

A: Yes. We have high-tech ex/imp operations balance deficit. There is no equivalence. Therefore there is a triad: increase of wages - rise of its productivity - high-tech management. The said factors can keep us afloat two, three, even four years, but we should tackle a problem, at which Latin-American countries failed. They also had their periods of sufficient economic growth, but failed to bridge the technology gap. That is, they were unable to make innovation conception working, failed to go about high-tech production and services.

Consequently, during the said period our country has a stupendous work to do: attract our available intellectual resources and create our own national innovative model, which will provide for the long-term effect of development. Then we would use last five successful years, add three-four years of inertial development, and afterwards-in a few years-we could proceed with essentially innovative growth. To my mind, only then we will call it real Ukrainian "economic miracle". That is it needs a whole complex of definite circumstances, positive factors and even contradictions. Equally well it may fail. But we should but believe.

Q: Unfortunately, there are still many black holes in our economy, in particular in agriculture. Is there any hope to restore normal privity there?

A: Only normal agro-market can rescue us from this property whirlpool. It is a time-consuming process. Last-year food market quakes are not likely to repeat. I mean grain price highs. Though that one could be prevented in the case of the competent policy of the state. Buying a year or two in advance could provide stabilizing resources. Now we already have this experience and will create a stabilization fund.

Now there is a reasonable rise of meat prices. But I see no menace in it. It will level off in time. That is, to my mind, this year agriculture will bring no misfortune for the state and society.

As to the property collisions, we are but go through it. In many regions there already appears a real proprietor, who diversifies his activity, that is, he is for the comprehensive approach-from growing agricultural cultures up to processing, which is extraordinarily important for the neighborhood, as it creates job. I see here a possible long-term positive dynamics.

There are knotty social problems in the country. On the one hand, there is a surplus population: on the other-peasants quickly get older. Besides, a part of them is demoralized. To my mind, the latter ones won't do it. But with constant economic growth we will have resources to tackle the priority rural social problems. Though there are about three million of self-employed villagers making their living due to their own subsidiary economies. Therefore there is a long way to travel yet.

Is it terrible? Presumably, no. Many millions of farmers in the whole world are employed in pre-market agribusiness. And their position is little by little turning for the best. The state will have to try and make do with pre-market forms in order to improve

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their efficiency. But this is a difficult problem and I wouldn't forecast now. It isn't a problem of real landownership. There are more difficult negative factors.

Q: And, finally, let us return to the question of poverty in Ukraine. Is there any hope? Besides the normal economy, there is a shadow one, you know.

A: Yes, there is a shadow economy. But we can measure it. We know quite a bit about it now. As to your question, even the poorest strata of population have more, than they declare, say, wages or pensions. The in-depth research shows that even the poorest strata spend 30 percent more than they officially get. In the groups of medium consumption the misbalance is greater-40-45 percent. That is, a person getting, say, two thousand hryvnias a month, has additional eight-to-nine hundred hryvnias.

Against this background there is a huge number of population, which does not get enough material welfare for tolerable human life. In many instances the pattern of consumption is distorted, and people spend all money they earn to pay for food and housing. Therefore, poverty in Ukraine is still threatening, and life of some categories of population is hopeless. My estimate is that 30-40 percent of fellow-citizens have a distorted pattern of consumption. This is too much.

The mankind has found no remedy against poverty, except for the development of economy based on humanistic ideals. The doctrine of egalitarianism failed. I think that the present political strife will not hamper our economic progress: both competitive sides stick to the same principles. But we shouldn't trouble trouble as the saying goes. All of us take interest in the real Ukrainian "economic miracle". Then we will be on equal terms with the rest of the world, which, alas, does not spare outsiders. Let's hope we will be lucky.

Main Macroeconomic Indicators of Ukraine

as % of the previous year

1) December to December

2) January-September

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Main Macroeconomic Indicators Ukraine in 2004

¹⁾ Exduding freight delivering by railways of the CIS countries.

Main Macroeconomic Indicators Ukraine in 2004

as % of the corresponding period of the previous year

© 2004 Interstate Statistical Committee of the CIS

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