Low Mass Purchasing Power Is the Main Enemy of Investment

Ukrainian President Leonid Kuchma addressed the consultative meeting with a comprehensive speech in which he characterized the current economic situation in Ukraine and paid special attention to the development of high-tech industries, particularly mentioning the recently adopted law on technological parks in Kyiv and Kharkiv, based on the Paton Institute of Electrical Welding and Institute of Monoclinic Crystals, and the Semiconductor Technologies and Materials, Optical Electronics and Sensory Equipment Technological Park. The President said Ukraine has great opportunities in the agrarian sector whose products are being exported to eighty countries.

Ukraine is also assuming great importance as a transport state. Mr. Kuchma said in his speech that “work is being speeded up to establish in 2000-2004 the national network of international transport corridors and integrate it in the transport systems of the countries of Europe, Asia, the Baltic and Black Sea regions.” “The same,” he continued, “also applies to the improvement of the national telecommunications network on the basis of the new technologies of incorporating it into the global information structure.” The President promised that tax, land, civil, and customs codes will be adopted by the end of the year.

The council participants were pleased with the improved situation in Ukraine and the desire of the legislative branch to support the President’s initiatives. This kind of function was attended for the first time by Verkhovna Rada Speaker Ivan Pliushch, a significant event.

Foreign participants noted the efforts made by the President, his willingness to look into the problems of investors and to take account of their wishes, and the atmosphere now emerging in this country.

However, this favorable atmosphere can be lost very easily. For instance, one of the foreign participants in the meeting expressed a wish that reforms be carried out not in the name of reforms but for the sake of their practical implementation.

Especially indicative is the example cited by Mr. Jim Temerty, president of Northland Power (Canada). They have drawn up an investment project for the Darnytsia Thermal Power Plant (Kyiv), collected all imaginable and unimaginable permissions, and planned to launch the project in December 1999. But it never happened: the investors are still waiting for the outcome of the current energy market wars in the Cabinet.

In an epoch of such rapid technological developments, a six month wait is not only pure loss to the investor and the country but also a danger that the now modern project may become obsolete by the time it comes on line. One must understand that we do not live in the Stone Age, and there is no place for debates dragging on for months.

The investors appreciate our difficulties and are ready to be patient, but they cannot be patient forever. Whether investments will come only depends on us, on the changes in our mentality, as Serhiy Liovochkin, the Consultative Council secretary, said.

What obstacles do we face here? In addition to wishing to see the investment climate improved, and deregulation and tax reforms carried out, foreign investors also pointed out such an essential hurdle as an extremely low purchasing power of the population. Even Coca-Cola is losing money in Ukraine. And what about the companies that specialize in high- tech and high-cost products?

So what does the government intend to do about this? As one of the main macroeconomic indicators of Ukraine’s economic and social development for 2001, the Cabinet of Ministers plans to set average annual wages, excluding those of agricultural workers, as “high” as 279.39 hryvnias at an average exchange rate of 6.7 hryvnias for $1, i.e., $41.70. At the same time, a joint governmental-parliamentary commission identified the 2000 subsistence level as 215-263 hryvnias. Obviously, this will rise in 2001. But even if this minimum does not exceed 263 hryvnias, what will be left for this country’s all investors, both domestic and foreign? A staggering 16 hryvnias! We do not count here pensioners and agricultural workers who are well below the subsistence level. Will a sound-minded investor go to a country where the population’s average earned income is insufficient even to meet their physiological needs? Investments will begin to pay off with an average earned income of $250-300 a month, and an investment boom can be expected at the average take-home pay tops $1000. This is why Ukraine has received a mere $3257 million in investment in nine years, while Poland, with a smaller population, had over $20 billion invested as far back in 1998.

What we in Ukraine now call investment is only market reconnaissance in the expectation of changes.

President Kuchma tells almost all public meetings that it is necessary to ensure growth of the population’s purchasing power, which implies a different ideology and strategy of reforms, but the Cabinet stubbornly turns a deaf ear to these calls. Solving this problem is the main strategic task in this country. And large-scale foreign investment can be expected only after domestic investment.

Thanks to the active pressure of foreign investors, the attitude toward business in this country is clearly beginning to improve, but the pace of these improvements is extremely slow. It is easier for foreign investors, for they are protected by their own states and can afford to wait. They have many years of experience working in the markets of the developing countries. But can Ukraine afford to wait? And who will protect the domestic investor?

As one of the foreign council members noted, the total capital of the companies represented by foreign members of the Consultative Council equals fifteen economies of Ukraine. For this reason, this country has an alternative: either to abandon private investment projects and sell the country wholesale and let the investors themselves think up what to do with us or to finally draw up a clear strategy of reforms designed to foresee events and ensure dynamic development of the domestic market, accelerated growth of the population’s purchasing power, to create conditions for internal investment and provide for double digit GDP growth. In that case, it might not even be necessary to try to woo foreign investors; on the contrary, this would create conditions such that Ukraine will itself be in the position to choose partners most suitable to achieving its strategic objectives.