By Serhiy UDOVYK
LAST WEEK VIKTOR YUSHCHENKO AND IHOR MYTIUKOV ANNOUNCED FURTHER STEPS TO STABILIZE THE HRYVNIA. ACCORDING TO THE NBU HEAD, THE MAIN THING IS TO RESTORE PEOPLE’S CONFIDENCE IN THE NATIONAL CURRENCY, BECAUSE THE DYNAMICS OF THE MONETARY INDICES DO NOT TALLY WITH THE CURRENT HRYVNIA RATE
Ukraine is considered to have its own monetary unit, the hryvnia, as well as its own fiscal system. Scholarly debate is centered on which of the two systems is better — Keynesian economics or monetarism — and whether the inflation rate should be as low as possible or allowed to remain rather high.
To answer, one has to consider the functions of money. Any national monetary unit is supposed to be a means of accumulation, unit of value, and means of turnover. In Ukraine, the first two functions are steadily discharged by the dollar, whether directly or otherwise. Suppose we consider the third function, means of turnover. This is characterized by parameters such as the monetarization level, that is, the amount of money present in a given economy.
Many believe that Ukraine has an extremely low monetarization level, some 15%, while in the developed countries it is 100% in Great Britain, 70% in Germany, 120% in Switzerland, 100-120% in China, 70% in the United States, and in the former Soviet Union it was 80%.
15% monetarization level implies an almost eight-fold annual monetary turnover, which is unlikely. For example, in the United States the M2 turnover rate ranges between 1.5 and 1.8.
The low monetary level in the economy inevitably results in growing accounts payable or commercial liabilities. In Ukraine, they totaled UAH 161.4 billion as of September 1, 1999. Accounts receivable were UAH 213.1 billion, while the money stock was a mere UAH 20.4 billion. The economy responds to lower monetarization using defensive measures: barter and settlement of interenterprise arrears (SIAs). This actually spells quasi-money. Combating barter inevitably leads to growing SIAs and vice versa. Combating barter and SIAs simultaneously at a fixed monetarization level cannot but cause economic stagnation. Meanwhile, pumping money directly into turnover by way of emission can only make things worse; however interpreted, high inflation means a greater tax burden on the entire economy, meaning that the first two functions of money are ruled out.
In actuality, the roots of today’s critical condition of the Ukrainian economy are traced in an altogether different direction; here the monetarization level is actually much lower than one percent.
To understand this, one ought to return to the well-known Marxist formula: money-commodity-money. The notion of commodity is understood in all civilized countries as the national wealth in its entirety: buildings and premises, the land, goods, services, air, radio, and television frequencies, mineral resources, etc. For the economy to function effectively, the money stock must tally with the commodities in turnover. The USSR had ten- ruble and over banknotes secured by all the assets of the State Bank, and Treasury notes (one-, two-, and three-ruble) with the legend that each such note is secured by the entire wealth of the USSR.
When Ludwig Erhard instituted the Deutschmark he calculated the amount of money required for normal domestic turnover, proceeding from existing costs, subtracting eurodollars introduced in Germany as per Marshall Plan.
What caused the current Ukrainian monetary problems? This is easily answered if one looks back to the time the karbovanets was instituted. After the Russian fiscal system was separated with the aid of the Russian Conversion Center (RCC), Ukraine acted in a purely formal manner; all the money in ruble bank accounts were renamed karbovantsi and the rubles on hand started being exchanged for karbovantsi, yet the latter’s stability lasted less than a month (at an early stage, due to short supply and people’s confidence in the new “firm” monetary unit, a karbovanets could be sold for ten rubles). However, pumping money through the emission center, which could hardly be described as a national bank, quickly led to the karbovanets slide, first against the ruble and then affecting the non-cash karbovanets. All this provided extremely fertile ground for quick private enrichment if one had access to RCC where the exchange rate remained 1:1.
In other words, unlike Ludwig Erhard, the karbovanets was introduced relying on neither the Keynesian nor monetarist model. In fact, the newborn karbovanets relied on nothing. In the absence of a well thought out tax system, taxes were collected through emission, as in the early years of the Soviet rule. In other words, the whole country was taxed by way of inflation. This stepped up the dollarization process and enhanced the desire to secure one’s money by investing in tangible assets: gold, housing, car, and other types of property. This explains the sharp decline in the monetarization level: from 80% to 12%, although eventually rising to 15%. But 15% was determined by the narrow basis of goods in turnover. We will return to this later.
The 1996 soft institution of the hryvnia cannot be regarded as the introduction of a national monetary unit, because it really consisted in merely renaming the karbovanets as the hryvnia, without taking into account the nation’s assets, wealth, average national product unit selling price, or the amount of goods and services. In other words, the so-called hryvnia reform was not monetarist nor is current monetary policy.
The principal element of influence that can be exerted in Keynesian economics is changing the interest rate. In Ukraine, this rate is so high (because of the general distrust of the official economic policy and senselessly harsh tax policy) that changing it either way will have no effect on the economy. This rate is meant only for venture capital which after August 17, 1998, became noticeably less risky, demanding even higher interest rates for the risks it takes. As a result we have a truly and singularly ineffective monetary policy.
Hence the unique ratio between the anticipated 1999 foreign trade turnover and anticipated 1999 GDP: over 90%. A breathtaking level for any developed country (in 1999, it was 78%, a nonetheless staggering value).
The result of “instituting” such a national monetary unit was that privatized apartments, shared industrial projects, privatized plots, and much more built and created with dollar turnover was thrown overboard. Back in 1992-93, the dollar was actively introduced against all such property, acting as the means of turnover. Thus, Kyiv’s private housing market alone is worth at least $15 billion. In 1998, a total of $1 billion worth of apartments was sold on the Desiatyna Exchange, while Ukraine’s total MO was about $1.9 billion in 1999. It is clear that all this money cannot even secure normal tax payments at the existing rates, even if every taxpayer wanted to. Even more striking statistics were cited by Anatoly Halchynsky. Considering the existing rates, the cost of privatized plots is UAH 190 billion. Compare this to the country’s money stock (M2): UAH 20.4 billion. Now add here the private housing facilities and all shared property and you will understand only too well that even the $7-8 billion currently estimated to be indirectly involved in turnover (regardless of all the greenbacks being used as a means of accumulation) cannot serve Ukraine’s economy. And so Ukraine is gasping for air in the absence of its own national monetary unit and is simply unable to show active growth, because the property of its citizens is not involved in the commodity- money relationships. In addition, there is public property which is not secured by money.
Simultaneously, the existing monetary unit, the hryvnia, relies only on the scanty National Bank reserves, thus artificially restricting this country’s potential and playing a purely decorative role. Yet it is convenient in demonstrating to the West any measures demanded by IMF, because given the monetary market’s current condition, any IMF proposals cannot seriously affect the economy with its sun and shadow sectors. Evidence of this is found in retail commodity turnover statistics. In seven months of 1999, this turnover amounted, according to the Derzhkomstat [State Statistics Committee], to UAH 12.48 billion or UAH 32.8 per capita monthly, which is simply incompatible with real life, seeing all those expensive foreign limousines plying the streets.
There is a staggering amount of property in Ukraine: 70-80% of the aggregate national wealth. It is easy to evaluate at the existing costs, but most of this property is not supported by money. In other words, it hangs suspended, taking no part in the national commodity-money turnover. Some 10-15% of the aggregate property is ensured by dollars, but the dollar cannot function 100% effectively as a means of turnover, catering to only semi- legitimate and illicit, shadow, markets. By using dollars in the national monetary turnover we secure US seniority, precisely the emission income amounting to at least $200 million annually. Next comes quasi-currency — barter deals and SIAs — with the hryvnia bringing up the rear, at best ensuring several percent of the money stock this country needs to stay alive. Thus it is safe to assume that Ukraine actually has no monetary unit of its own. Money is universally known as the blood of economy. This is precisely the reason for all the structural upheavals and the glaring difference between retail commodity turnover and, say, rent in Kyiv reaching $30 per square meter a month and more (as in the developed European countries with tens of thousands of dollars of per capita income per annum).
Actually, President Kuchma’s land reform decree can be viewed from this angle. Essentially correct, it may have precisely the opposite results. Allocating plots free of charge will only worsen the monetary turnover nationwide, because plots of land thus handed out will not be involved in commodity-money relationships; people will have nothing to buy this land with. Considering that 15% of the privatized land is assessed at $190 billion, privatizing another 50% will further lower the real monetarization level, causing an even greater distortion of the price range and the industrial-agricultural ratio. It is necessary to hand out land along with, say, land money that can be converted into real money against commodity supplies to the countryside via land banks, set up for this purpose. Other patterns could be also used. Otherwise we will be witness to something like Nechui-Levytsky’s brilliant story, The Kaidash Family.
The new government’s first priority should be a serious analysis of monetary turnover. First, it is necessary to secure measures aimed at binding citizens’ property by instituting investment hryvnias. It is further necessary to set up investment and mortgage banks and use them to painlessly introduce those investment hryvnias against private and collective property. A set of comprehensive measures could be developed to bind this property and national assets by the national monetary unit. Another important and mandatory step would be crowding the dollar out of turnover, yet this can be accomplished only on a voluntary basis, without coercion, relying on public confidence in the national currency. Such steps must be made in tandem with tax reform, adjusted to the amount in turnover. In such case the tax rates would lose their real meaning, because these rates directly depend on the monetarization level. This reform must be secured by people’s trust and is quite realistic, considering the votes collected by Leonid Kuchma which can only be considered as a credit of confidence.
If and when President Kuchma succeeds in getting these unused resources involved in the economy, the way he did with the younger generation in his election campaign, there will be a radical impact on the economy, returning it to the operational mode. Once solved, this problem will automatically stop capital flight and facilitate tax reform.
If correctly implement, the reform in the national money turnover will cause the national income to grow several times over, several years from now, thus securing an adequate living standard for both pensioners and working citizens, creating favorable conditions for domestic investment.
PS: To help form a better idea about what is happening in Ukraine, I would like to offer two problems that can be solved by readers familiar with structural analysis.
1. Imagine a virtual polity, something like UK or USA, with the imports balanced by exports and external conditions that can be disregarded. What would be the inflation rate in this virtual polity if all citizens’ property except clothes, household appliances, furniture, and foods, is nationalized? How much more would a set of furniture cost then?
2. What would happen to the monetary turnover in this imaginary state if, after setting a monetary balance, citizens’ property were handed out using vouchers? Note that there is no foreign aid, just as there are no dollars. What would be the barter rate? What would substitute for the dollar? What could save the economy from collapse? Here is an answer to the second one: perhaps something like seashells from the Mumbo Jumbo Islands.
As to the third: imagine a shadow economy using Mumbo Jumbo seashells as the national currency.