omic development strategy over the next 10 years. However, Ukraine’s goal of integration into the EU faces some near insurmountable problems and is, in fact, fundamentally misguided. In particular, there are a number of areas where Ukraine will find it hard to catch up with Europe.
1) The economy is to a large extent “virtual.”
This is particularly apparent from the example of Kyiv city and oblast. While together accounting for only 8 percent of the country’s total industrial capacity and less than 10 percent of its population, these areas receive more than 40 percent of all bank loans and budget funding, and attract the lion’s share of the country’s intellectual potential. This sort of “investment attractiveness” serves only to deepen existing regional disparities. This situation contrasts with that in the EU, where a system of transfer payments provides financial support for economically backward regions.
Economic integration in Western Europe is based on intensifying trade relations and not on creation of “islands of prosperity.”
2) The system of state management is paralyzed.
Ukraine’s administrative “elite” is still populated with second-rate bureaucratic types from the former Soviet system. In today’s bureaucracy, individual personality tends to be neglected; family relations count for more than qualifications; bullying takes precedence over motivation in relations between managers and subordinates; irresponsibility prevails over professionalism.
In Europe, executive bodies serve the real sector of the economy in which added value is created. State jobs are considered highly prestigious. Officials’ duties are clearly prescribed. They also possess real powers, which allow them to solve problems without obtaining the consent of their chiefs. Competitive salaries encourage high labor productivity .
In Ukraine, officials of the low and medium level are unable to make decision on virtually any question without the agreement of their heads of department. Low salaries encourage officials to solve problems in an unofficial way, that is through graft.
Meanwhile, the development of bilateral political contacts is impeded due to the inability of most higher-level officials to speak any foreign languages.
3) Development of the market is stalled.
Though President Leonid Kuchma proclaimed the launch of market reforms back in 1994, a culture of entepreneurship is only just starting to emerge. Rule of law and contractual relations are observed only fitfully. Despite being an industrialized country with a highly skilled labour force, Ukraine has still to develop the classic features of capitalism. The banking system will need at least 10-15 years before it is able to provide the economy with long-term investment resources. During this time various clan structures will retain a strong monopoly position, resisting the introduction of market competition.
Liberal models have been operating in many parts of Europe for more than 300 years. Over the last 50 years, the elements of social market economy have reached a high level of development. While some Western European countries have had free labour forces for 500 years, it has only existed in Ukraine for 11 years.
Accordingly, Ukrainians have a very different understanding of such fundamental features of the market economy as individual freedom, social equality, individual responsibility, free prices, open markets, effective competition, monetary stability and stable financial institutions.
4) The agricultural sector is oversized.
The agricultural sector accounts for 21.5 percent of Ukraine’s economy, whereas in the EU the figure is only 2.1 percent.
In order to promote Ukrainian agricultural production on European markets, the investment needed is still lacking. However, it is even more important to create a strong lobby, since many categories of Ukrainian products are clearly superior to their European analogues, which are cultivated in hothouses with abundant utilization of pesticides. Consequently, they will face additional barriers due to the competition they will create for traditional European suppliers.
5) Ukraine is in no position to join the EMU.
Ukraine lacks a clear monetary strategy and the financial sector is isolated from the real economy. Ukraine has no resources of its own for long-term investments. The low incomes of the population and mistrust of the banking system prevent the accumulation of capital. There is still no effective stock exchange. Cash settlements account for 43 percent of the broad money, whereas in the euro area it is 3 percent. Average rate of banking credits up to 1 year, is 6 percent in euro area, and 25-31 percent in Ukraine. In the first nine months 2002, Ukraine saw deflation of 3.3 percent, while in the euro area in August there was inflation of 2.1 percent.
Ukraine’s exclusion from EMU is perhaps an advantage. Introduction of a single currency deprived Euro area countries of control over exchange rates – an important adjustment tool for external trade. Mistrust of the euro resulted in capital outflows amounting to some 600 billion euro a year from the euro area between 1998-2001 – mainly to the United States. Speaking at the National Bank of Ukraine on Sept. 11, 2001, German economist Wilhelm Hankel predicted the collapse of EMU and advised Ukraine: “Act like Great Britain, join the EMU only when it really survives, but use the time before for building up a strong financial system in Ukraine.”
Forget about integration
The list of core problems facing Ukraine in its attempt to integrate into the EU could be continued. But even if these issues can be dealt with satisfactorily, the question still arises: What can Ukraine offer Europe? In addition to their desire to live in Europe, and enjoy democracy and material well-being, and their industriousness and business acumen, Ukrainians will bring to Europe a number of less attractive qualities: these include lack of education, provincialism, excessive self-regard and a baseless confidence in their superiority. It is understandable that Europeans with their age-old cultural traditions will seek to shield themselves from all these negative qualities.
If Ukrainians want to preserve what they have achieved in the last 11 years and avoid being transformed into suppliers of cheap labor and agricultural products for a new inter-govermental superpower, it would be a good idea to shelve their vain attempts at integration in the EU. The country should instead focus on implementation of its obligations under the existing Partnership and Cooperation Agreement with the EU.
There are plenty of examples of prosperous countries that do not strive for integration into regional blocks. If Ukraine decides to follow the examples of Switzerland and Singapore and today concentrates on domestic development, it has a chance of becoming a wealthy country at the heart of Eastern Europe in about 50 years time.
Instead of talking about military alliances and political integration, Ukraine should build an administrative and scientific elite to replace today’s “komsomol elite” over the next five to ten years. In order to achieve this, it will be necessary to develop a culture in which existing strategies are subject to healthy criticism as a means to improve their quality and generate strong arguments for future activities.
There is saying: “When a house is finished, a death occurs.” The European house was finished long ago, and now Europeans are busy modernizing what is already built. Because creation is a necessary condition for growth.
We also possess this opportunity. By reviving our country, we will improve ourselves as people and as a nation.
Oleksy Kuznetsov, Ph.D., is an adviser to the chairman of the council of the National Bank of Ukraine.
