Volodymyr Hro­is­man: “We could see 5% growth by QIV'2018”

“We could see 5% growth by QIV 2018”

The Ukrainian Week - - CONTENTS - In­ter­viewed by Dmytro Krapyvenko

Ukraine's Prime-Min­is­ter on eco­nomic strat­egy, in­no­va­tions, state mo­nop­o­lies, and pri­va­ti­za­tions planned for 2018

The Ukrainian Week talked to Ukraine’s Prime-Min­is­ter about eco­nomic strat­egy, in­no­va­tive de­vel­op­ment, the fu­ture of state mo­nop­o­lies, and the large-scaled pri­va­ti­za­tions planned for 2018.

Which sec­tors of the do­mes­tic econ­omy would you call the driv­ers of eco­nomic growth?

— In top place, with­out any doubt, is the farm sec­tor, which cur­rently ac­counts for nearly 15% of our GDP, and then comes min­ing and met­al­lurgy, in­fra­struc­ture projects, ma­chine-build­ing, and the mil­i­tary-in­dus­trial com­plex (MIC). One of our Gov­ern­ment’s main ob­jec­tives is to in­cen­tivize the man­u­fac­ture of goods with a high added value. For in­stance, we plan to pro­vide in­cen­tives for pro­duc­ing farm equip­ment. Al­to­gether, UAH 1 bil­lion has been al­lo­cated for such pur­poses in 2018.

The MIC will also be a ma­jor driver. We’ve al­lo­cated UAH 16.5b for the de­vel­op­ment of new weaponry and up­graded ver­sions of old weapons. Plans are also to set up an ex­port cred­it­ing agency whose pur­pose will be to at­tract fund­ing to pro­mote Ukrainian-made prod­ucts on for­eign mar­kets.

How long is min­ing and met­al­lurgy ex­pected to be an eco­nomic driver, es­pe­cially if we con­sider China's rapid ex­pan­sion in this sec­tor of the world econ­omy?

— We have some se­ri­ous com­pet­i­tive ad­van­tages in met­al­lurgy and de­mand for Ukrainian prod­ucts is on the rise. Right how con­sid­er­able cap­i­tal is be­ing in­vested in mod­ern­iza­tion and en­vi­ron­men­tal se­cu­rity at many en­ter­prises in this sec­tor, which is why I be­lieve this is a pri­mary sec­tor in terms of the growth of the do­mes­tic econ­omy. There are ma­jor op­por­tu­ni­ties for an eco­nomic break­through right now, in­clud­ing in min­ing and met­al­lurgy.

How can Ukraine grow do­mes­tic cham­pi­ons, mean­ing transna­tional cor­po­ra­tions like those that emerged among the Asian tigers?

— This is not an easy path. We al­ready have a num­ber of high-profile com­pa­nies that are present on in­ter­na­tional stock ex­changes. As the Gov­ern­ment, we have to pro­vide the nec­es­sary cli­mate to at­tract in­vest­ment from both Ukrainian and in­ter­na­tional com­pa­nies. Right now we’re work­ing on a joint ven­ture with Gen­eral Elec­tric to lo­cal­ize 40% of the man­u­fac­ture of lo­co­mo­tives in Ukraine. Of course, not all Ukrainian com­pa­nies have big-name brands, but that hasn’t stopped us from com­ing in first place in global ex­ports of sun­flower oil and sev­enth place for meat ex­ports.

The ra­tio­nale be­hind Asia's na­tional cham­pi­ons was to en­ter open niches, ex­pand those ar­eas of man­u­fac­tur­ing that were just be­gin­ning to be­come pop­u­lar, such as con­sumer elec­tron­ics. To­day, de­mand is grow­ing for drones, so­lar pan­els and so on. What op­por­tu­ni­ties do we have in these sec­tors?

— In­no­va­tion is a ma­jor pre-con­di­tion for sus­tain­able eco­nomic growth. For in­stance, right now Ukraine has a strong po­si­tion in UAV tech­nol­ogy and we’re clearly com­pet­i­tive there. We also have plenty of po­ten­tial in farm tech­nol­ogy in the agro-in­dus­trial com­plex (AIC). To­day, there are many start-ups across the coun­try which should even­tu­ally be able to en­ter global mar­kets. But first we need to take steps to es­tab­lish the nec­es­sary ecosys­tems for the trans­fer of tech­nolo­gies into the real sec­tor. We also have to pay at­ten­tion to changes on world mar­kets: some­thing that was a hot trend 20 years ago may not have much de­mand to­day. Ukraine’s IT sec­tor, on the other hand, is very strong and should be en­cour­aged.

How prob­a­ble is it that the MIC will be­come a driv­ing force to mod­ern­ize the en­tire econ­omy, the way it did for Is­rael?

— We’re get­ting some very good feed­back for high-tech de­vel­op­ments in the de­fense sec­tor. I won’t go into de­tails, but things are look­ing up, both there and in the aero­space in­dus­try. Right now we’re just start­ing to re­vive sup­port for this sec­tor. In­vest­ments in the MIC that I have al­ready men­tioned in­volved the ap­pli­ca­tion of high-tech com­po­nents.

How can Ukraine in­crease the high tech aspect of its de­fense in­dus­try?

— We’ve al­ready drafted a bill to pro­tect in­tel­lec­tual prop­erty. This is a very im­por­tant step be­cause in­ven­tions and in­no­va­tions must be reg­is­tered in Ukraine. We need to also en­sure the trans­fer of in­ven­tions to in­dus­trial ap­pli­ca­tions. For this pur­pose, the 2018 Bud­get in­cludes UAH 50 mil­lion to set up an In­no­va­tion Sup­port Fund.

How can sci­ence and busi­ness be brought closer to­gether?

— Our en­tire sys­tem for or­ga­niz­ing sci­ence needs to be change, to­gether with its fund­ing and in­cen­tives. We need to sup­port com­pet­i­tive de­vel­op­ments and tech­nol­ogy trans­fers, we need to up­grade the tech­ni­cal side of our sci­en­tific in­sti­tu­tions, and we need to sup­port young sci­en­tists. The Sci­ence and Tech­nol­ogy Coun­cil that I chair will meet this month to dis­cuss set­ting up an ecosys­tem to sup­port in­no­va­tive de­vel­op­ments. Once this gets go­ing, the in­no­va­tive com­po­nent of the MIC will be­gin to ex­pand steadily.

How much time will this take?

— I think we will spend 2018 look­ing for new ap­proaches and new in­stru­ments. Busi­ness is cer­tainly in­ter­ested in this. Ukrainian com­pa­nies al­ready pro­duce many in­no­va­tive prod­ucts, as we can see from their ac­tive in­volve­ment in in­ter­na­tional ex­po­si­tions.

Ev­ery Ukrainian PM has talked up Ukraine's great eco­nomic po­ten­tial. To what ex­tent is that po­ten­tial ac­tu­ally be­ing tapped into to­day?

— It has in­deed been a kind of post-soviet tra­di­tion, to talk in such clichés. When I talk about po­ten­tial, it’s not in the sense that what I’m pro­ject­ing but what we ac­tu­ally have to of­fer to­day. Look at Ukraine now: it has the ca­pac­ity for growth from its un­der­ground re­sources to outer space. The prob­lem in the past was that no one in gov­ern­ment was ac­tu­ally in­ter­ested in in­no­va­tive de­vel­op­ment. All that in­ter­ested them was to over-reg­u­late, to cor­rupt and to co-opt any op­por­tu­ni­ties com­ing Ukraine’s way. The chal­lenge to­day is to re­move un­nec­es­sary re­stric­tions and pro­vide proper mar­ket con­di­tions. Then we will see ev­ery sec­tor flour­ish. The space in­dus­try, health­care, the farm sec­tor… ev­ery area has its own tech­nolo­gies, but they need the means to ap­ply these. The In­no­va­tion Sup­port Fund will be one such in­stru­ment.

What are your thoughts about a Mar­shall Plan for Ukraine?

— Ukraine can use ev­ery­thing that will spur eco­nomic growth. The $5bn a year of in­vest­ment that the “Mar­shall Plan” an­tic­i­pates is a very im­por­tant re­source. But we also need a nor­mal in­vest­ment cli­mate, a high-qual­ity ju­di­ciary, open com­pe­ti­tion in the pri­va­ti­za­tion of non-strate­gic as­sets, rea­son­able reg­u­la­tions, and mod­ern­ized in­fra­struc­ture and in­dus­try. That will guar­an­tee eco­nomic growth.

How in­ter­ested are other coun­tries in help­ing grow a high-tech com­peti­tor?

— The ques­tion of Ukraine’s com­pet­i­tive­ness is mainly ours to re­solve. We need a strong econ­omy and a high stan­dard of liv­ing. For this pur­pose we need to take ad­van­tage of the ex­pe­ri­ence and prac­tices of other coun­tries and in­sti­tute them here, but we need to also un­der­stand that other coun­tries will in­evitably de­fend their na­tional in­ter­ests first.

What kind of ex­pert sup­port does the Gov­ern­ment need?

— The gov­ern­ment, Ukrainian so­ci­ety and ex­pert cir­cles are all in the process of evolv­ing. We’ve all gone down a cer­tain path in the years since the Euro­maidan and have gained a lot of ex­pe­ri­ence—in­clud­ing lessons learned from our own mis­takes. The main thing is to be able to an­a­lyze self-crit­i­cally and to draw the right con­clu­sions. As to out­side ex­pert help, I think that’s some­thing we have plenty of.

How are Ukraine's state mo­nop­o­lies do­ing these days?

— Per­son­ally, I’m com­pletely against mo­nop­o­lies, whether pub­lic or pri­vate. They al­ways have a neg­a­tive im­pact on com­pe­ti­tion. I be­lieve that we need to im­prove our anti-mo­nop­oly leg­is­la­tion and we’re work­ing on that right now. The Anti-Mo­nop­oly Com­mit­tee needs to have more power in terms of in­ves­ti­gat­ing car­tels.

As to state mo­nop­o­lies, we do need to get rid of quite a few of them, such as UkrSpirt, the al­co­hol maker. It’s com­pletely un­ac­cept­able to have that kind of mo­nop­oly! This is def­i­nitely a hang­over from stal­in­ist times. NaftoGaz Ukrainy also needs to def­i­nitely be de­mo­nop­o­lized, to make it a com­pet­i­tive, trans­par­ent com­pany. Where there is no mo­nop­oly, we see a mar­ket and com­pe­ti­tion, and con­sumers, mean­ing Ukrainian cit­i­zens, come out the win­ners.

Does that mean also get­ting rid of UkrZal­iznyt­sia's mo­nop­oly, the state rail­way?

— This is a case where we need to avoid mak­ing mis­takes, as those have cost other coun­tries dearly when they tried to re­form their rail­ways. The tracks must re­main in pub­lic hands, but rolling stock is al­ready partly in pri­vate fleets in Ukraine. This is the first step to­wards de­mo­nop­o­liza­tion. I sin­cerely hope that we will be able to es­tab­lish a su­per­vi­sory board at UkrZal­iznyt­sia that can in­sti­tute qual­ity de­ci­sions.

How well su­per­vised are state en­ter­prises or is there fric­tion with the line min­istries?

— The func­tion of a min­istry is to es­tab­lish pol­icy, not to man­age busi­nesses. That kind of func­tion more prop­erly be­longs to in­de­pen­dent su­per­vi­sory boards. This is a stan­dard mech­a­nism that we are now es­tab­lish­ing at NAK Naftogaz Ukrainy. The main thing is for there to be clear sep­a­ra­tion. Look­ing for con­flicts is not con­struc­tive.

Can we ex­pect to see the pri­va­ti­za­tion of ma­jor as­sets in 2018?

— The state still owns 3,500 as­sets, among which some 100-200 should re­main in pub­lic hands. The rest will go un­der the ham­mer. Most state-owned en­ter­prises tend to be in­ef­fi­cient and cor­rupt. I, for one, have no in­ten­tion of ac­cept­ing that kind of sit­u­a­tion. I hope that the Verkhovna Rada will pass the new bill on pri­va­ti­za­tion, which is cur­rently pre­pared for sec­ond read­ing. After this we can start large-scale pri­va­ti­za­tion.

How likely is the Rada to put the brakes on pri­va­ti­za­tion, just like it does on a pre­dictable ba­sis with the sale of farm­land?

— We’ve al­ready voted in pen­sion, education and med­i­cal re­forms. We’ve also gone half­way down the path with pri­va­ti­za­tion. We in­tend to carry out a ma­jor pub­lic aware­ness cam­paign so that peo­ple un­der­stand what’s at stake. Same with the land mar­ket: let’s sit down and talk about how to es­tab­lish land re­la­tions so that both Ukraine and those who live here will ben­e­fit.

So far, it looks like the pop­ulists are win­ning the board. They've man­aged to roll out an en­tire mythol­ogy against re­forms, built on pop­u­lar pho­bias.

— Peo­ple are be­ing fright­ened in or­der to ma­nip­u­late them. There isn’t a coun­try any­where that pop­ulist have done some­thing good. Why are Ukraini­ans so poor to­day? Be­cause pop­ulists and cor­rup­tion­eers have driven many ar­eas of life to the brink. I firmly be­lieve in two prin­ci­ples in pol­i­tics: be re­spon­si­ble and act sys­tem­at­i­cally. Peo­ple value re­sults. Those who are try­ing to ham­per re­forms are not work­ing for Ukraine. They con peo­ple by play­ing on their emo­tions and us­ing threats that they them­selves have set up. Ev­ery­one ac­tu­ally un­der­stands this. So vot­ers have to sim­ply de­mand that politi­cians do what they promised. And if they fail, to boot them out. I have my own suc­cess story in this sense: two terms as mayor of Vin­nyt­sia, which has been rated one of the best cities in Ukraine to­day for qual­ity of life.

What re­sults will de­cen­tral­iza­tion bring in 2018?

— It seems to me that we have been able to “in­fect” or­di­nary Ukraini­ans with this con­cept. At first, peo­ple were very skep­ti­cal of de­cen­tral­iza­tion, but now they can see that it is pro­vid­ing them with new in­fra­struc­ture, new so­cial fa­cil­i­ties, a new qual­ity of life and new jobs. Any kind of change needs to be per­fected. You have the con­cep­tual phase, the im­ple­men­ta­tion phase, and the ad­just­ment phase. Right now we are in the process of set­ting up ter­ri­to­rial com­mu­ni­ties: the more ef­fec­tive merg­ers we have, the greater the ba­sis for con­sid­er­ing this re­form a suc­cess at the na­tional level. Yes, I know that some ter­ri­to­rial com­mu­ni­ties are in the way of county coun­cils and ad­min­is­tra­tion, but I am al­ways on the side of the OTH [uni­fied ter­ri­to­rial com­mu­ni­ties]. Lo­cal com­mu­nity gov­ern­ments are the most ef­fec­tive way of gov­ern­ing.

What is the level of the shadow econ­omy these days and what is the Gov­ern­ment do­ing to re­duce it fur­ther?

— Ex­perts say be­tween 40-50% of GDP, which is an un­usu­ally high pro­por­tion. The best way to com­bat shadow economies is to im­prove fis­cal­iza­tion at the same time while stream­lin­ing it: make it so that over­sight doesn’t get in the way of hon­est busi­ness op­er­a­tions.

We have changed the way that the VAT is ad­min­is­trated and there are no longer any loop­holes that can be used to min­i­mize taxes and move cap­i­tal abroad. We've also ap­proved new re­port­ing stan­dards and are us­ing stricter mea­sures against con­tra­band. Rais­ing the min­i­mum wage was also an im­por­tant step in mov­ing busi­ness out of the shad­ows

When it comes to fur­ther eco­nomic de­vel­op­ment, what coun­try would you say Ukraine can be com­pared to?

— If we’re talk­ing about the coun­try’s am­bi­tions, then we should ori­ent on Poland. But over­all we should be look­ing both west and north, mean­ing Scan­di­navia, the Top 10 coun­tries for qual­ity of life, at the hap­pi­ness in­dex, and at pros­per­ity, longevity and birth rates. De­mo­graph­ics pro­vide an im­por­tant in­di­ca­tor of a coun­try’s de­vel­op­ment.

Ok, let's talk de­mo­graph­ics. Right now, ev­ery­one's say­ing that Ukraine will face a huge gap in its la­bor force be­cause of la­bor mi­gra­tion.

— La­bor mi­gra­tion is a global trend. You see it even within Europe. Poles move to the UK, Ukraini­ans move to Poland.

So who will come to work in Ukraine?

— The ques­tion is not who will come to work in Ukraine but how to grow our econ­omy and en­sure de­cent wages. There is no other op­tion. If our econ­omy be­gins to grow at 5% and more, peo­ple will start to come back.

When do you think we might reach that pace of growth?

— If the pri­va­ti­za­tion bill is passed, along with other im­por­tant bills, we could see 5%+ growth in the fourth quar­ter of 2018.

And then elec­tions and new chal­lenges?

— We need to keep work­ing so that changes are fun­da­men­tal and ir­re­versible. This will make the en­tire sys­tem more sta­ble and then elec­tions won’t have a sig­nif­i­cant im­pact on it.

THERE ARE MANY START-UPS ACROSS UKRAINE WHICH SHOULD EVEN­TU­ALLY BE ABLE TO EN­TER GLOBAL MAR­KETS. BUT FIRST WE NEED TO TAKE STEPS TO ES­TAB­LISH THE NEC­ES­SARY ECOSYS­TEMS FOR THE TRANS­FER OF TECH­NOLO­GIES INTO THE REAL SEC­TOR

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