IMF supports Ukraine's vital functions without solving its structural problems

Author : Bohdan Danylyshyn

Source : 112 Ukraine

Continuation of the IMF lending will help maintain macroeconomic and macrofinance stability in Ukraine, however, it does not stop country's its de-industrialization
11:10, 10 August 2018

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The question of whether Ukraine will receive the next tranche of the IMF loan is the most topical in the domestic economic discourse. It is really important because the continuation of the IMF lending will help maintain macroeconomic and macrofinance stability in Ukraine, reduce the risks of fluctuating the hryvnia exchange rate, facilitate the return of external debts. However, this will not solve the structural problems of our country's economy; it will not stop its de-industrialization too. Cooperation with the IMF is a window of opportunity, our "pass" into a globalized world. But life is development, not life support of its vital functions.

The main tool by which developed countries affect the state of the national economy is industrial policy. I am referring to the implementation by the state of measures to support or develop specific sectors of the national economy. At this moment, I am criticized by those who believe that the state should only deal with deregulation and the formation of the conditions for development. It is true, but we are not alone in this world, and we must fight to survive. The Norwegian economist E. Reinert in his "How Rich Countries Got Rich ... and Why Poor Countries Stay Poor" book writes that certain countries achieved economic prosperity precisely because of the development of industrial production and international trade. The inappropriate question is whether Ukraine needs an industrial policy. The question should be posed as follows: what measures should be taken to ensure that the industrial policy was modern and successful in Ukraine.

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First. The cluster approach to industrial policy. Modern foreign experience shows that industrial policy is transformed from a sectoral (integration of raw materials, technologies, and means of production) into a cluster (based on scientific support, production and the general circle of consumers). Clusters of the first generation used a "scale effect" and horizontal integration. Modern innovative clusters are based on inter-industry transfer and interpenetration of innovations. They combine, for example, the textile industry with the development of non-woven materials, aircraft construction with microelectronics and the development of state-of-the-art structural materials. On this basis, it is necessary to form clusters in such promising high-tech sectors of the Ukrainian economy as the aerospace complex, machine-tool building, and production of the modern agricultural machinery. Ukrainian science should be preserved and transformed (especially its technical component) to work in the cluster system. The state should support those areas of scientific research that would influence the formation of the future specialization of the country's economy.

Second. Why do I focus on the production of agricultural machinery? In Ukraine, the share of agricultural exports in 2017 was 41% of total exports (in monetary terms). This shows the crucial role of the agro-industrial sector. In states with the leading role of the agrarian sector in the economy, industrial policy should support production related to the development of national agriculture.

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Third. Direct investment in the technological sectors of the Ukrainian economy in most cases is the only opportunity to attract "smart capital" to our country, which is a key factor in Ukraine's technological development in the future. Without creating attractive conditions for this type of direct investment of the domestic economy, high-margin technology enterprises will continue to "wash out" in favor of low-margin non-technological business, which depends heavily on the world price environment. And this will further increase our economic risks in the event of a drop in commodity prices on world commodity markets. Investments in high technologies will be one of the key elements of increasing the competitiveness of the Ukrainian economy and ensuring its resilience to external risks.

Fourth. Development of mechanical engineering. The economy of all leading industrialized countries is based precisely on this industry. Ukraine should develop a comprehensive strategy for the modernization of the engineering sector, which will contain an assessment of the need for modernization for various sub-industries of engineering, the development of activities that meet this need. As part of this, investment promotion is necessary, because low labor productivity indicates that the capital intensity and technological equipment of most sub-sectors of machine building in Ukraine are low. This is the main obstacle to the competitiveness of the sector in the world market. Ukrainian engineering products can be competitive at a price, but often do not fully comply with the standards that exist on international markets. The foreign direct investment must be attracted to the machine building industry by creating attractive conditions for joint (Ukrainian and international) enterprises.

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Fifth. Tax incentives. In order to attract foreign investment, it is advisable to set down the coefficients to the size of individual taxes, depending on the number of jobs created or depending on the volume of exports of high-tech products produced at these enterprises.

Sixth. It requires a radical improvement in the promotion of Ukrainian exports. International experience shows that in many countries export support structures that combine different activities (from marketing to systems for mitigating financial risks) work successfully. That is, the beginning of the export-credit agency for Ukraine is relevant.

Seventh. It is necessary to develop a private-state partnership, especially in terms of the infrastructure. This mechanism is used when the state is interested in the inflow of private investment but does not intend to lose ownership of the facility to which it is necessary to invest. Applying the mechanism of public-private partnership, Ukraine has the opportunity to use the financial potential of the private sector in the face of limited state financing. An important feature of this partnership is the synergy of financial opportunities of private companies and government guarantees, which significantly increase the level of trust in the projects being implemented. The terms of cooperation are rigidly fixed: a time period is set, during which the parties (the state and the private company) are not entitled to withdraw from the project, the guarantees and obligations of both parties are prescribed.

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And, the most crucial issue is the people reforming Ukraine’s economy. The well-known American social scientist and "father" of socioeconomics A. Etzioni wrote about the IMF advisors: "They know the parameters of the states, but taking care of the processes that occur when the economy moves from one state to another is out of their competence." In the process of economic reforms, we must, first of all, rely on ourselves, and not on the IMF, the World Bank or other respected international organizations. We should be grateful to them for their support and help in difficult times. But the ideologists of economic reforms in Ukraine should be Ukrainians who perfectly know "anatomy and physiology," the value system, the socioeconomic "genetics" of the economy and society. A set of reforms is the first step. Reforms must complement each other and contribute to qualitative changes. Only then the society will accept them.

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