Harvard Ukrainian Business Initiative holds seminar (05/18/97)

Harvard Ukrainian Business Initiative holds seminar

CAMBRIDGE, Mass. - "There is a cloud above Ukraine that will rain down money, a Western businessman once told me," said Oleksander Paskhaver, economic advisor to the president of Ukraine, "and indeed, capital is a crucial factor in unlocking Ukraine's economic development potential."

Mr. Paskhaver spoke to a group of business and policy people on May 1, a brilliant, cloudless day at the Ukrainian Research Institute at Harvard, in Cambridge, Mass. The seminar on "Prospects for Economic Reform and Development in Ukraine in Light of Recent Political and Economic Events" was sponsored by the Harvard Ukrainian Business Initiative (HUBI).

According to Mr. Paskhaver, Ukraine has successfully realized many of the economic reforms instituted over the six years, since the break-up of the Soviet Union. However, because of the manner in which economic growth is measured, such good news is not reflected in statistics.

All of the former Soviet republics operate with a shadow economy; in Ukraine this represents over half of the economy. It is not corrupt - it simply is a barter system held over from the Soviet era, Mr. Paskhaver explained. This so-called shadow economy is thriving. So when official statistics report a negative GNP they do not reflect over half of the economy, which is doing well and is a market economy.

Ukraine's reported GNP was minus 10 percent in 1996, which is then interpreted as Ukraine not adapting to the free market economy. Besides the reporting discrepancy, Ukraine has passed some major milestones. As reported by Mr. Paskhaver: more than one-half of the economy is in private ownership; macro-economic changes, such as controlling inflation and balancing the budget, have been achieved; and Ukrainians have become accustomed to the new economic conditions. All of these have been achieved without any political or social instability.

Mr. Paskhaver, who is a member of what the West refers to as a "president's kitchen Cabinet" explained that other necessary steps, besides the infusion of capital, are needed in order for Ukraine to realize the implemented economic reforms. These are: passage and implementation of an already developed economic reform package, restructuring of the government administration to minimize bureaucracy and the development of the small business sector.

"Corruption among government officials is focused on by the Western media," commented Mr. Paskhaver, "and aside from the moral issue - which is a serious consideration - entrepreneurs in Ukraine do not consider it one of the major obstacles to doing business in Ukraine."

When questioned about what the government is doing to eliminate corruption, he mentioned the reorganization of some government officials' responsibilities and procedures for reporting to more senior authorities that are designed to maximize accountability. Where previously all officials involved on an issue were required to approve any measure related to it, now that approval process will be streamlined.

Another major step in the right direction, he said, is the appointment of a banker as vice prime minister for economic reform. As a businessman he understands the necessity of eliminating unnecessary bureaucracy and providing accountability.

David Snelbecker, a member of the Harvard Institute for International Development's Macroeconomic Project in Ukraine, which is directed by Jeffrey Sachs, explained the economic reforms that have been achieved over the past five years.

Inflation, which was at 10,000 percent in 1993, was 40 percent in 1996 and is projected to be 21-22 percent for 1997; there is a stable exchange rate and the economy is greatly liberalized. Direct foreign investment has increased, but still is one of the lowest in the new independent states. Foreign investors are holding off on investing capital, he noted, until passage of the economic reform package on taxation, pensions, the social sphere, deregulation and privatization, and enterprise.

Also stalled, until the budget is adopted by the Verkhovna Rada, is disbursement of several billion dollars in bilateral loans from the International Monetary Fund (IMF). The situation is soon to be resolved, according to Mr. Snelbecker, as the pressure mounts with President Leonid Kuchma arriving in the United States for the Gore-Kuchma meeting scheduled for May 14-16.

Another concern of businesspeople, to which Mr. Paskhaver spoke, was investment opportunities in Ukraine. The ones with minimal risks are Treasury Bills. Another opportunity is in emerging small- and medium-sized businesses. With the advantage of new management teams, they are on the cutting edge of breaking into Ukraine's market of 52 million people.

Another area of opportunity is with joint stock companies whose shares are traded on the secondary market. Because these companies were not developed, he noted they are undervalued and therefore represent opportunities. Some specific industries which are underutilized are machine-building, tobacco, chocolate and textiles.

This seminar was the first in a series sponsored by the Harvard Ukrainian Business Initiative. The HUBI is a re-positioning of the Project on Economic Reform in Ukraine (PERU) in collaboration with the Ukrainian Research Institute at Harvard. The PERU, previously affiliated with the Kennedy School of Government, maintained a leading role in advising the political elite of Ukraine since 1991 that helped to transform Ukraine from a Soviet system and engage in political reform and economic privatization.

The goal of the HUBI is to promote both the development of business in Ukraine and Ukrainian governmental reforms needed to support the country's development into a market economy. "Time alone will not bring Ukraine into the global economy. Western businesspeople need improved access to and understanding of economic and political events. The HUBI's connection with business and government leaders, as well as the academic community, strategically positions us to facilitate these reforms and to promote the development of business," explained Director Janet Hunkel.

The HUBI publishes the leading journals on pertinent economic, legislative and political events: The Ukrainian Legal and Economic Bulletin and The Economic Monitor, distributed directly by the HUBI from the Ukrainian Research Institute at Harvard.

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