Armed with slogans like “Let’s not reinvent the wheel,” Ukraine’s government is doing just that. At least that’s the impression I got from some of the recent statements by Borys Kolesnikov, the deputy prime minister who is in charge of infrastructure and preparation for the Euro 2012 football championship.
“The secrets of economic success in the world have been uncovered a long time ago, and Ukraine should take advantage of them,” Kolesnikov said at a recent conference.
He said that one of the major secrets is “localization of production,” meaning that the government should try its best to bring into the country the production of international brands that see Ukraine as a market for their consumption.
The first two examples he gave of successful negotiations to achieve this goal were Hyundai and KIA Motors. The South Korean Hyundai, which had earlier won a 240 million euro tender for supplying 10 speed trains for Ukraine’s railway, has agreed to eventually start producing the same trains in Ukraine, Kolesnikov said. He also said another Korean giant, KIA Motors, will produce cars in Lutsk.
Although it’s nice that the government and individual officials have some strategy for economic development and are trying to make it work, it seems that by chasing these odd deals the government is failing to see the wood for the trees.
In other words, this strategy has at least two obvious flaws.
One of them is that while hand-picking its friends, the government is letting massive opportunities slip through their fingers just because they don’t register on their radar.
One of the most obvious cases is the unfortunate exit of IKEA from Ukraine. The Swedish furniture giant with a 23.8 billion euro global turnover tried for five years to enter the Ukrainain market. But instead of opening six stores in Kyiv, Odesa, Kharkiv, Dnipropetrovsk, Donetsk and Lviv, the company sold off its assets in April 2010 and a month later announced it was leaving the market for the foreseeable future.
The company’s assets included two furniture plants in Ivano-Frankovsk and Zakarpattya oblasts and a wood processing plant, also in western Ukraine. All of them made IKEA-branded furniture for the Russian market, and were supposed to do the same for Ukraine.
Political leaders must create attractive conditions for business.
Moreover, IKEA, like many other giants, tends to source its goods from local producers in the countries of its presence. After McDonald’s came to Ukraine in 1997, it pushed local growers and suppliers to produce anything from lettuce and ice-cream cones to chicken nuggets for the global chain.
So, when IKEA quit Ukraine, the nation lost not just the $2.5 billion of direct investment the company had planned to inject into its first store in Odesa, but a whole industry that would eventually develop.
Admittedly, some of the blame lies with the previous government and the local governments who could not see business and social benefits from helping IKEA overcome its problems, creating multiple obstacles instead with a hope to get kick-offs.
But the current government has been in place for 1.5 years, and many things have changed in business in this time. Yet there is not even a whiff of a rumor that IKEA (and many others) have changed their minds about Ukraine.
Which brings us to the second, even bigger, flaw in the government strategy: manual micro-management of individual investors’ problems rather than creating a good playing field for everyone.
ArcelorMittal, the nation’s largest foreign investor, pumped $4.8 billion into buying a steel plant in Kryvyi Rih in 2005. Despite its vast resources, the company only managed to get out of trouble with the customs and tax services after President Victor Yanukovych’s personal involvement.
But if you happen to have no connections – you’re on your own against the system.
There is still little attempt to change the system, to make the rules of the game more comfortable for everyone. Deregulation of the business environment remains a dream. Nobody can guarantee your property rights – the list goes on. In one of the most quoted reports, Doing Business by the World Bank, Ukraine comfortably sits in the back seat. This year its number is 145 out of 183 nations, between Syria and Gambia.
So, if there is one thing Kolesnikov is right about it’s that the secret for success has been uncovered a long time ago, and Ukraine needs to use it. And the secret is good business rules for all.
Kyiv Post editor Katya Gorchinskaya can be reached at [email protected]
