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It is now predictable that countries in transition are facing a double challenge: “The economies of Central and Eastern Europe face a multidimensional transition. They face the challenge of transition to the market economy, the insertion into the capitalist world economy, and the transition to a new techno‑economic paradigm,” according to the book “Central European Industry in the Information Age.”
On the road to the Information Society, Ukraine is significantly weighed down by the Soviet legacy.
Much of the strategic behavior of successful individuals in the Network Economy are just the opposite of classic Soviet behavior. And some of them would have been sent to pave highways or work in the gulags for just this sort of behavior. For instance, the permanent disclosure and sharing of information, the elimination of top‑down management to fit with the paradigm of network‑decentralized organization, are attitudes and concepts alien to the Soviet culture.
On the side of human resources requirement, there is a huge gap between the Soviet approach of labor force allocation and the expectations of the new managers. Mobility is one of the basic requirements, but Ukraine has never abolished the “propiska” rule.
The USSR established its own standards that were not only different from those in the West, but were entirely aimed at disconnecting the Soviet world from the West. The consequences for independent Ukraine are visible: no energy‑saving policy, lack of basic environment‑protection rules, Soviet‑style higher education, etc.
Nevertheless, during the first decade of its independence, Ukraine was exposed to a dramatic opening into the world economy. Two main forces drove the changes experienced by Ukrainian society during the first decade of its independence. On one hand, the transfer of state‑owned productive assets into private hands, instead of leading to emergence of a full‑fledged market economy, reinforced the clans and “kleptocracies” and exacerbated predatory attitudes born in the Soviet age. At the same time Ukrainian enterprises established new commercial ties with Western economies, and structural changes in foreign trade are clearly visible. The synergy between these phenomena caused the main characteristics of Ukraine in the post‑Soviet period.
The clan control over a substantial part of Soviet productive assets maintains a specialization of exports that contradicts the rule of comparative advantage, particularly regarding energy dependency. In 2000, 45 percent of export value was due to the metal sector, where production took place in outmoded plants using energy‑intensive processes. In 2000, 50 percent of import value was due to energy. The analysis of the structure of the remaining 50 percent provides clear evidence of the penetration of the Ukrainian market by Western brands.
The limitation of changes in consumption patterns to a small group of nouveaux rich produced two kinds of distortions in the distribution of international brands over the country. First, we find that among those brands, those related with luxury goods are over‑represented, which is a reflection of the polarized income distribution. Second, we see a dramatic increase in brand piracy, corresponding not only to satisfaction of the brand fetishism of the low‑income groups, but also on a broader scale, to the creation of a domestic industry able to export significant quantities of counterfeited goods.
A vicious circle is keeping Ukraine out of the global change of the network economy. That is, out of the only sustainable economic prospect. Massive foreign investment is needed to upgrade the productive assets and reorient their strategy in coherence with worldwide changes. Nevertheless, the action of clans and cartels have created a discouraging climate for foreign investors: This includes unclear and incoherent legal framework, high degree of corruption of public authorities and lack of trust between potential business partners.
One of the main tracks for any policy devoted to fostering Ukraine’s healthy opening to the world economy is the adoption and enforcement of rules, norms and standards promoted by the international business community.
Justification of the non‑respect of intellectual property rights through the argument that the non‑affordability of Western‑priced cultural and electronic goods forces people to manufacture and purchase counterfeit goods, is not acceptable. What is at issue is not the remuneration of creativity as an asset, but more the fact that the level and distribution of salaries in Ukraine does not reflect a well‑functioning market economy. If the situation of flagrant and massive violation of intellectual property right continues, Ukraine will send a clear signal to the international business community: “We do no want to take part in the world economy.”
One must be very pleased by the efforts made by Ukraine to join WTO, since it is a way to speed the adoption of international standards in the national business legal framework. Nevertheless, once membership is achieved, if the enforcement procedures are not effective, Ukraine will be exposed to harmful economic sanctions. WTO accession must be considered as a first goal, it must be accompanied by a clear strategy for building efficient enforcement agencies.
Looking through the good and bad experiences of transition in Ukraine, and notwithstanding the adoption of international standard business, one can measure the importance of the new features of the world economy and draw conclusions.
Two examples will illustrate this remark.
The first is supplied by the failure of the public tenders launched by the State Property Fund in the process of privatizing certain state enterprises, as a result of the lack of bidders. If the objective of the SPF is to make foreign investors interested in buying domestic assets, then a survey of the potential investor’s strategy should take place, prior to any decision regarding the assets to be offered through international tenders.
The monitoring of foreign trade reveals the growing importance of light industry exports to the EU under give‑and‑take arrangements. At the same time, there is a substantial growth in the light industry output driven by the outsourcing strategies of EU firms. If this particular niche benefits from the relocation of activities, even with the business barriers and the lack of trust, it is because of the relatively small investment that is needed from both Ukrainian and foreign partners. With an improvement in the legal business framework and in its enforcement, together with an active policy to promote industrial skills and capability, Ukraine could benefit from the outsourcing process in other branches, such as machine and aircraft manufacturing, or electrical engineering. Such a policy would produce positive changes in the foreign trade structure. The so‑called transition of Ukraine to the market economy will be completed only when the country plays an active role in the Global Network Economy, for the simple reason that there is other sustainable economic space. Measuring the progress of reforms using the yardstick of the new economic categories is the only way to assess the results and reformulate the policies.
Jean‑Paul Blandinieres is a macroeconomic expert with the Ukrainian‑European Policy and Legal Advice Center.
