“Holland disease”
By Vjacheslav Kalugin, Ruslan Illichev

According to the existing structure of its export, the Ukrainian economy will not be able to maintain a long impressive increase rate of the GNP that has been set in the recent years.
       Inspired by the indexes of the economic growth in 2003, the Ukrainian officials have already declared grandiose plans: to reach a stable GNP growth tempo in the nearest years at the rate not less than 10%. What will become the source of the Ukrainian “economic miracle” is already known – these are, as usual, export oriented branches, that bona fide pull the national economy out year by year. At the same time, despite a certain success of the Ukrainian exporters last year, the prospect to reach such scale macroeconomic figures with the existing structure of export is rather risky. Many economists really think that any long-term forecast of the development of Ukraine can be senseless: as export plays a considerable role in the GNP, all macroeconomic figures in the end will depend on the price of the metal, the behavior of which is hard to forecast.

The wrong structure       

It’s widely known, that nowadays export oriented branches keep afloat the whole economy of Ukraine: export gives approximately 60% of the Ukrainian GNP. For you to compare – the economy of Germany depends on the deliveries abroad by 24%, France and Great Britain – by 20%, the US – only by 10%.
       Whereas increasing export is extremely profitable for a state. According to the calculations made by Russian economists, one dollar of the exported industrial products will add 2 dollars to the GNP. This fact is well known to any Ukrainian official, who deals with the regulation of external economic activity. In the Ukrainian economy, export is at the beginning of the macroeconomic chain: it “pulls” the growth of industrial manufacturing, employment, salary, development of the internal market and service sphere. At the same time the structure of Ukrainian export is far from perfect.  Whatever the economists – market experts say about the raw orientation of the Soviet economy, but the USSR tried to adhere precisely to the parity of external deliveries: 50% of raw material, 50% of products with a high level of  processing and, accordingly, with a high level of added value.
       Ukraine occupied a lucrative niche for the export of products with a low level of processing long time ago. At the beginning of the 90s, while suffering from currency shortage, the Ukrainian authorities started stimulating the manufactures that had any export potential in every possible way.  In fact, among all Ukrainian exporters the most competitive on the external markets were metallurgists and chemists, who offered comparatively qualitative and cheap production to foreign consumers. As a result, starting from 1996, the raw export share in the total structure of external deliveries has increased up to 60%. The share of the export of metal products in the whole export volume each year constitutes not less than 35%.
       It may sound paradoxical, but the Ukrainian export structure is even worse than the Russian one, in spite of a strongly defined raw character of the latter one. The world experience shows, that mining and export of minerals or power supply is a highly profitable business. Moreover, the owners of extraction industries have no special necessity to invest the profit gained back in the manufacture (it’s possible to get only a couple of new quarry dump trucks) and research sales markets (there’s always a stable demand for gas, oil, and ore). At the same time, the financial resources received can be successfully invested into untypical manufactures, including ones with a high level of processing, and to the financial sector. In particular, in Russia such oil giants as LUKOIL or TNK have successfully mastered the similar schemes of distribution of their own capital.
       The situation concerning the Ukrainian export is slightly different. Firstly, it is mainly represented by power consuming production with a low level of processing.  Secondly, profitability of the major national export industries has been supported artificially for a long time. It’s not a secret that competitiveness of national metallurgists and chemists in many respects is reached by various privileges and preferences. It means the competitiveness is built on special relations with the government. It is still easy to remember the deliveries of electric power and gas to large metallurgical combines at reduced prices, tax experiments in the mining and metallurgical complexes, imposing the export duties on metal scrap upon  the demand of the metallurgists. It’s natural that the liquidation of all these preferences will negatively effect the condition of the Ukrainian export locomotive – metallurgical industry.
       The prospects of further modernization of the national metallurgy as a necessary condition of maintenance of competitiveness on the world market are viewed as a problem. In estimations of foreign experts as far as the technical side of the metallurgy of Ukraine concerned, it has already been claiming on the “honorable” first place in the world among the backward manufactures.
       The capital funds of some enterprises have already served for 50-60 years, or even 100 years, though the standard is 25 years. Over the last several years, the production of open-hearth furnace steel has been steadily reducing all over the world, but it cannot be said about the Ukrainian reality. According to the information of the European steel and cast iron institute, Ukraine is the world leader of the open-hearth furnace steel production.
        Since the day of gaining the independence, Ukraine has occupied the honorable seventh place in the world as for the metal rolling production. Only during two last years the owners of metallurgical combines started investing more or less significant resources into their manufactures reconstruction. The amount is about $100-150 million per year. Russian metallurgists, for example, spend approximately $500 millions on modernization annually. Besides, more than $2 billion of foreign capital have already been invested into this industry of the Russian economy.

External risks       

Almost annually Ukrainian experts frighten the population of a possible collapse in the export volume. But, as a rule, in spite of the pessimistic forecasts, the Ukrainian export remains alive with an enviable obstinacy, withstanding the changes in the world market situation. Another question is how long will Ukrainian exporters have the immunity like this? There is a concept of “Holland disease” in the world practice, when the economy of a country depends excessively on the export of raw products and, accordingly, on the fluctuations of the world market. We can say confidently, that “Holland disease” in the economy of Ukraine has a chronic character.
        To what extent will Ukrainian economy suffice the export reserve after 2004 seems hard to be predicted. The experience of the recent years shows, that national producers of metal rolling and chemical products are first among the pretenders to antidumping investigations on the part of foreign countries. Although, to tell the truth, we need to mention, that the lion’s share of the world’s antidumping sanctions falls on metal and chemistry. It is up to 70% of all the antidumping investigations, according to some estimations. The export of domestic grain can hardly become a worthy alternative to the metal export. It’s hard to sale agricultural products today. Besides, today the volume of the export of Ukrainian grain depends on the good weather more than on the effective work of Ukrainian landowners.
        The diversification of sales markets is also beneath criticism. Ukrainian manufacturers have almost lost major solvent markets of the North America. More than half of the national metal rolling export falls on the countries of Asia, Middle East and Africa. The reorientation to the markets of developing countries is only a temporary respite for the Ukrainian exporters. No one can guarantee that the quality of our products even in several years will meet the demands of consumers of these countries or their industrial enterprises will not initiate an antidumping investigation against the Ukrainian products. According to the estimations of “Ukrvneshekspertiza”, any further increase in the presence of the Ukrainian metal rolling manufacturers on the markets of Asia, Africa and Middle East can lead to new antidumping investigations. The only consolation in this situation can be the fact that the Ukrainian metal rolling is re-exported from these countries to the market of the USA, but this path is getting narrower.
        Our exporters will meet serious difficulties in the current year. Although the results of foreign trade activities in the first two months of 2004 don’t give any rise to anxiety, the situation can change essentially in May. The Business journal has already written that owing to the extension of the European Union since May 1, the national manufacturers can lose up to $600 million.

Useless support       

 The state policy concerning the national export support is characterized by a strange contradiction.
        Ukrainian exporters often complain that the key obstacles to their foreign trade activities are created inside Ukraine. The refund of the value-added tax (VAT) is probably the most considerable problem of the Ukrainian export. Total losses of the companies from the VAT non-refund several times as much as possible losses of the exporters connected with the European Union extension.  For exporters it’s difficult to discourse on possibilities of the expansion of Ukrainian companies to external markets in the situation, when the government with the help of taxes and other official instruments restricts the export of their products. The only thing they really can do is to complain. Most Ukrainian manufacturers complain of the practice to delay the export VAT refund established by the State Tax Administration of Ukraine (STAU), as well as of the necessity of giving so called bribes for the refund of this tax. Most exporters assure that to return 100% volume of the VAT is possible only after the recourse to the court, however, it requires hiring highly qualified lawyers and waiting for several months. In the opinion of Ukrainian officials, the duration of the refund procedure for the export VAT is determined by the existence of many false exporters among the companies wishing to refund the export VAT. Nevertheless, according to our source in the STAU, only 20% of requests to refund the export VAT come from false companies. And solvent companies suffer from the activities of officials. Due to the practice established, manufacturers have to constantly, without any desire, credit the government for free, excluding from their turnover the financial resources, which are so hard to get.
        Moreover, almost all the Ukrainian exporters complain that in the country there’s no system of informational support of exporters. In the majority of developed countries with the help of such systems companies can for free receive any information about the markets and countries they are interested in. The absence of ecological certificates, certificates of quality, certificates of the quality control systems, which are necessary in European countries and other countries, has a negative effect on the manufacturers. For example, the Ukrainian automobile engines or cars, which haven’t obtained the European ecological certificates, are simply not allowed to the EU markets. According to the Ministry of Economy of Ukraine, in our country among more than 8 thousand of national and interstate standards, only 1400 are harmonized with the European and international standards.