Not too long ago the Ukrainians mentioned the recession in manufacturing outputs as an absolutely natural process. Finally, the first signs of recovery started showing, and we began to argue about stability of the new economic growth in general and about

STATISTICAL SOAP BUBBLES

must not lead to euphoria as regards stability of industrial growth

Tamara SHIGAYEVA

Not too long ago the Ukrainians mentioned the recession in manufacturing outputs as an absolutely natural process. Finally, the first signs of recovery started showing, and we began to argue about stability of the new economic growth in general and about that of industrial recovery in particular. We may congratulate one another on this achievement because we have progressed from discussing the causes of the recession to analysis of the reasons that produced the recovery, and this is a whole different thing. However, there are still some problems left in all this.

Let us briefly recall the industrial output trends in the 1st quarter of 2000. It should be noted that manufacturing outputs added 9.7% compared to the last year’s corresponding figure. What exactly produced this growth? What are the key reasons for the growth? Well, they are just the same as back in 1999, namely:

favorable basis for comparison of output figures in the 1st quarter of 2000 with those of the last year;

some statistical metamorphoses that have produced the overstated production figures, while there was actually no recovery;

devaluation of the Ukrainian currency hryvnya, which backed competitiveness of Ukrainian products on domestic and foreign markets;

consumption of large quantities of power and natural gas on credit with no time limit set, which caused a further substantial growth of accounts payable to fuel and power companies;

certain structural adjustments in industrial production, which continue speeding up, though still giving no ground to speak of the radical changes in the country’s industrial pattern.

Let’s subject each one of these factors to analysis. The year 1999 kicked off with a recession in output continuing the 1998 autumn crisis. This decline was the favorable basis for comparison of the current year’s and the last year’s figures. This auspicious statistical situation will end this summer because the further production successes of the 2nd half of 2000 will be compared with the no-less-successful output figures of the 2nd half-year of 1999.

The statistical metamorphoses are the second factor of the production growth reported. For example, the statistics registers production growth in electric power industry, whereas the actual generation of electric power reduced. Electric power generation lowered 0.2% in the 1st quarter of 2000 against the respective period of the last year. Meanwhile, the statistical data insist on a 3.2% growth. The point is that this industry is still changing its pattern of power output in favor of the most expensive generating capacities, viz. thermal power stations. Simultaneously, power output of nuclear power plants and hydroelectric power stations, which generate cheaper energy, is going down substantially. However, these different power stations set different prices for their electric power, thus causing an increase in the aggregate amount of power sold. Well, the statistics interprets this as an actual production growth in the electric power generation. Similar things frequently occur in the other industries, although this inaccuracy shows itself the most prominently in the power generation, because the very same power is generated on completely different facilities. Therefore, the recovery in the power industry is nothing but fake because physical output of electric power stays the same, while the production pattern changes towards the most expensive facilities.

Devaluation of hryvnya was the key factor causing industrial production growth in the 1st quarter of 2000. This factor led to growing outputs of the primary exporting companies and to import substitution activity on the domestic market. Back in the 1st quarter of 1999 the National Bank of Ukraine artificially kept the exchange rate at 3.4-3.7 Ukrainian hryvnyas per US dollar. In that situation, Ukrainian exporters had poor competitiveness on foreign markets. Thus, Ukrainian enterprises had to lower manufacturing outputs back then, notably, chemical production dropped 12% and metal outputs reduced 4.5%.

Over the 1st quarter of 2000 the Ukrainian hryvnya lost more than 150% of its value against the respective period of 1999. Therefore, export production is booming, e.g., the growth in nonferrous metal industry has reached nearly one-quarter of the last year’s output. Recovery of the world markets (unlike the downswing in the post-crisis years of 1998-1999) has also contributed to the upturn in the Ukrainian export business. For example, the metal industry accounted for 30% of Ukraine’s total industrial output in the 1st quarter of the current year. This is unusually high. The sheer fact of such an increase is unfavorable in itself, because metalmaking consumes much power and fuel, i.e. the rather scarce resource for Ukraine. However, if the metal industry manages to make timely payments for electric power, coal, and natural gas consumed, the growth of metal outputs would not pose any threat to the country’s economy, contrary to certain forecasts. Besides, Ukraine simply cannot give up this primary source of its hard-currency export revenues.

Should the metallurgists be the main non-payers for fuel and power and should the power industry live on credit of all the other industries (this situation has occurred many times in the past), the country’s economy may find itself on the verge of collapse. In any case, greater outputs of the country’s metal or chemical industries cannot be Ukraine’s ultimate long-term strategy. The growth in these industries will come to a naught as soon as fixed assets become deteriorated, whereas there is no finance to renew the productive assets. However, as long as the existing capacities function more or less normally, they should not be a burden for Ukraine’s most prospective industries, notably, the processing industries, such as food processing, light industry, and woodworking. These industries benefit from devaluation of the Ukrainian national currency. After getting rid of quite a few relevant importers that did business in Ukraine last year, these industries continue taking over the domestic market. By the way, they scored the record-high production growth tempos of over 30% in the 1st quarter of this year.

Reduction in the hryvnya’s exchange value was unfavorable for the crude oil refining of Ukraine. This factor, accompanied by an increase in oil prices on the world markets, has led to an unexampled recession in this industry. It is becoming clear now that Ukrainian oil-processing enterprises have no future. This year, the downtime of Ukrainian oil refineries will generate numerous problems for the country’s agriculture, which traditionally received fuel on credit at the beginning of this spring. By the way, this fuel was made of Russian crude oil, accounts payable for which are not settled yet either.

It looks like this year Ukraine will have not a chance to make its own fuel, and ready-made fuel will have to be imported and paid for on time and in advance. There is also a question whether the State will be able to fund fuel supplies for agricultural purposes. However, today, it is already clear that this situation will make the new harvest of agricultural crops more expensive, and, possibly, lower the yields. It may be suspected that we are coming closer to the point where Ukrainian farm produce will be noncompetitive not only on foreign markets, but also on the domestic one. In this case, the chain reaction will lead to production decline in the food processing industry. These trends may show up as soon as autumn 2000.

Like a year ago, substantial uncovered accounts payable for fuel and power were among the next reasons for statistical optimism as regards the seeming growth of industrial outputs in the 1st quarter of 2000. Outstanding payables for electric power added 1.6 billion hryvnyas during the first three months of 2000. On the whole, Ukrainian consumers are in debt for seven months of fuel and power supplies. The industry’s accounts payable increased respectively gaining 1.7 billion hryvnyas.

Payments for natural gas consumed are about as pathetic. Gas consumption in the 1st quarter amounted to 3.7 billion hryvnyas, whereas only 1.16 billion hryvnyas were paid out, of which just 19% were paid in money (the rest was barter and various setoffs). As a result, fuel and power companies, which are mainly either state-owned or state-controlled, owe the largest amounts to the country’s budget. It may be inferred that certain Ukrainian enterprises run on only because they keep on consuming fuel and power for free.

This example illustrates the simplest model of a virtual economy. Virtual industrial upturn, which has become possible owing to unpaid consumption of fuel and power, further turns into the no-less virtual revenues of the country’s budget because fuel and power companies fail to settle for taxes payable.

Thus, out of everything else, structural adjustments in the industry are the only factor indeed contributing to a recovery. Fast output growth in the processing industries is the most noteworthy structural adjustment progress. In this context, success of Ukraine’s woodworking is the most prominent. This industry has reported the most significant production upturn among all the industries. This was achieved, first of all, owing to structural changes within the industry itself, as well as due to greater output of products with high added value, e.g. plywood, furniture, cardboard, etc. Output of the simplest woodworking products continued shrinking. Production growth in the food processing and light industry proceeded, although it was not very significant and equaled only 2 to 3% of the total industrial recovery rates. Yet, the important point is that the recovery is actually in place. The key trend is that structural adjustments have been launched, though they are not thorough and there are too many obstacles on their way. However, it is these changes that may secure the Ukrainian industry’s future.

Of course, we comprehend that the current growth is unstable, which brings us to the key question of what can make the growth stable? What objective and subjective reasons hamper stability of this growth?

We certainly must keep an eye on the external factors, which are not always favorable and are very important for the wide-open Ukrainian economy. Besides those, there are objective and subjective forces within the country that do not let the economy grow stably.

Industrial production index

The inauspicious economic and industrial patterns are the most important objective factors. The widely adopted Ukrainian opinion that the economic pattern may be changed administratively is deeply mistaken. The pattern cannot be altered simply with approval of corresponding recommendations or making of decisions, even as regards the State’s financing of selected industries. The patter mirrors all the social and economic conditions that have taken shape in the country. Moreover, it also reflects the former economic conditions that used to be prevalent in the country. Struggling against them is like fighting one’s own reflection in a mirror. To change the reflection, the object itself must be changed. This is why changes of social and economic conditions are the key tasks today.

Let us analyze in detail the pattern of industry, this cornerstone of the economy. Over the past decade, the industrial pattern has abruptly changed for the worse owing to two reasons, namely, domestic prices have climbed to the international rates, sometimes reaching or even surpassing them, and the external and internal economic environments have deteriorated.

As a result, the portion of base industries (including fuel and power sector and the metal industry) in the total manufacturing outputs has skyrocketed from 23% to 52% in terms of domestic prices. Based on the world prices, the share of base industries has increased from 50% to 61% during the years of Ukraine’s independence. The economy’s transition to the world prices was the major impact on the industrial pattern. This affected local base industries the most because their prices were several times different from those on the international markets.

Today, Ukraine is evolving towards an increased share of the base industries in the overall manufacturing output. This is a total dead end because the country is poor in fuel and power, which are gulped down by the base industries. Thus, Ukraine has no other way, but to import. Such import is justified only if the materials are consumed to make commodities with high added value, bound for subsequent export.

However, it is not like this in Ukraine. For example, metal-makers largely export iron and steel, i.e. the commodities with the minimal or even negative added value taking into account the outstanding payables to fuel and power companies. Their debts are either written off or restructured from time to time under pressure of strong governmental lobbies. It should be reminded once again that, being the most power-consuming products of the metal industry, iron and steel account for 30 to 35% of Ukraine’s overall commodity export, whereas articles made of ferrous metals make up only 3 to 5% of the total export.

The chemical industry, which is number two in the hierarchy of Ukrainian exporters, largely sells abroad the simple products of non-organic chemistry made from imported natural gas. Products with high added value, such as pharmaceutics, detergents, paints, etc., account for only tenths of a percent of the exports. Mineral products with low added value, viz. salt, ores, slag, cement clinker, and so on, are the top three in the Ukrainian exports.

On the other hand, products with high added value, for example, those of food processing or light industries, contribute only several percent to the total exports. The Ukrainian machine building has suffered the most significant losses on foreign markets. Unfortunately, products of this industry, which have the highest added values, continue losing their competitiveness.

Year after year, Ukraine’s export pattern worsens. Over the first months of this year, one could observe the old trends, namely, great increase in export of mineral products, iron, steel, and non-organic chemicals, along with a halved export of foodstuffs. Apparently, Ukraine was not able to work out a correct export policy and has made many mistakes, e.g. disallowing individual businessmen to export foodstuffs to the former USSR, imposing various duties, quotas, etc. These measures have resulted today in the loss of the most important markets, which are very difficult to win back. The unfavorable export pattern also spotlights a number of moderate budget limitations in favor of the industries that consume much power and manufacture low-added-value commodities. There are many obvious problems with the fiscal system, which subjects high-added-value products to the heaviest tax burdens, thus promoting output and export of simple, non-hi-tech commodities.

The largest investment industries, such as mechanical engineering and manufacture of construction materials, have suffered the greatest recession over the years of independence. The downturn in machinery building is called forth by low competitiveness of most products and by an imbalance between this industry’s structure and that of the country’s economy. This imbalance is understandable because the Ukrainian machinery building was designed as an integral component of the Soviet mechanical engineering complex to specialize in heavy machine building. Today the demand for these products is low due to the economic recession and qualitatively new structure. This is why adjustment of the machinery building is a rather tangled problem, which can be solved only if the other Ukrainian industries recover, coming up with demand for new machinery. The authorities’ present-day attempts to settle the problems of the machinery building through governmental centralized orders for farm equipment, aircraft, etc. have no future. It is just that consumers of these machines are short on solvency to pay for them even on the leasing terms, whereas the State cannot share these expenditures either. In order to make the economically sane orders for these products, the authorities have to back selected industrial consumers. Under the current Ukrainian conditions, this mainly means encouragement of the agricultural recovery, active foreign trade efforts to market Ukrainian-made equipment and machinery abroad, and attraction of the renowned global machinery manufacturers as investors. These investors can even set up assembly lines because later on Ukraine can get a chance to phase in complete production lines.

Similar arguments may be applied to another investment industry, that is to say the manufacturing of construction materials, which has shown the greatest production decline since 1990. Fortunately enough, the State did not make any attempts to render financial backup to this industry because otherwise it would have been a waste of money. However, despite numerous declarations, the authorities did not launch a road construction project, which could have brought many large and small investors to the country’s economy provided proper arrangement of all the details. This project could have given a push to construction in Ukraine and could have driven the construction material making out of a recession.

It is no wonder that the Ukrainian industries producing consumer goods have did bad. Over the years of independence, the living standard has deteriorated. Hyperinflation played the key part in this process being not only an economic, but also a political factor to a no lesser extent. It redistributed the capital in favor of the country’s top officers. These were not always able to keep the capital under control. The people have become poorer and, as a result, retail trade in Ukraine has curtailed more than threefold. In the CIS, Ukraine ranks the third only to Moldova and Georgia in terms of recession in retail trade. This has caused a tremendous downturn in the light industry and food processing. It was the light industry that suffered the most running into fierce competition with cheap commodities made in China, Turkey, and Poland. The situation in these industries has stabilized somewhat at present owing to small inflation rates. However, one should not anticipate a stable growth either since the purchasing capacity of the Ukrainian population continues going downhill.

In order to secure the growth in processing industries, it is necessary to improve the living standard. This task requires settlement of various simple and complicated problems. The simple problems comprise administrative and legal factors influencing this process, such as mandatory and timely payment of wages, salaries, pensions, and scholarships, as well as unquestionable legal and material liability for failure to make these payments on time. Companies that frequently fail to disburse the wages and salaries payable must be declared bankrupts and their management should be dismissed from the office. The increased legal responsibility and a bankruptcy mechanism will somewhat improve the situation with the people and the processing industries.

Besides, it is high time to generate efficient programs for battling against the crisis. These should be based on measures that would encourage economic structural adjustments, get rid of high-power-consuming facilities, and stimulate production growth in industries that produce high added values. It is more a subjective factor that Ukraine still does not have a clear reform program. Generation of such a program requires only the willingness and due skills.

the Metal