Ty­mofiy Mylo­vanov: “We have to build cap­i­tal­ism where those who do a lot re­ceive a lot”

“We have to build cap­i­tal­ism where those who do a lot re­ceive a lot”

The Ukrainian Week - - CONTENTS - In­ter­viewed by Lyubomyr Shava­lyuk

Deputy Chair­man of the NBU Coun­cil on mon­e­tary pol­icy, mid-term risks and fun­da­men­tal prob­lems in Ukraine's econ­omy

The Ukrainian Week spoke to Deputy Chair­man of the Na­tional Bank of Ukraine Coun­cil and Hon­orary Pres­i­dent of the Kyiv School of Eco­nomics about mon­e­tary pol­icy, midterm risks, fun­da­men­tal prob­lems in Ukraine’s econ­omy, the role of con­fi­dence and the restora­tion of fair­ness in eco­nomic devel­op­ment.

The NBU has in­creased the in­ter­est rate for the third time in a row. How does this af­fect the econ­omy?

— The NBU was fol­low­ing the rules like all reg­u­la­tors do. It in­creased the in­ter­est rate as a re­sponse to the grow­ing in­fla­tion pres­sure and ex­pec­ta­tions. Ini­tially, the in­fla­tion rate was ex­pected to hit 8-10% but it has crossed that and is not go­ing down. Some­thing has to be done about it. What in­stru­ments do we have? We need to make money more ex­pen­sive. That’s when it will be used less, so the prices won’t rise so fast. This is a very sim­ple con­nec­tion we see in prac­tice. When the mar­ket has more money and the price of prod­ucts doesn’t change, prices will be higher. And vice versa.

What is the NBU do­ing? It raises the in­ter­est rate to make sure that prices don’t grow so fast. This means that de­posit in­ter­est rates are likely to grow with time. When de­posits yielded 10% while in­fla­tion was 12-14%, some peo­ple may have pre­ferred to buy more bread or a car rather than de­posit their money. Now, it’s more con­ve­nient to de­posit money. So, the amount of money in the eco­nomic sys­tem will shrink while the amount of money on bank de­posits will in­crease. The NBU ster­il­izes that money by tak­ing it from banks and pay­ing a cer- tain in­ter­est rate to them. That’s how the NBU ac­com­plishes its goal of mak­ing money more ex­pen­sive.

That’s bad for the Cabi­net of Min­is­ters and some com­pa­nies. When money gets more ex­pen­sive, loans do too. The econ­omy al­ways works like that — what’s good for one per­son is bad for an­other. If I want to de­posit my money, it’s good for me. If some­one wants to get a loan, it’s bad for that per­son. There’s also macroe­co­nomic bal­ance: if we make money more ex­pen­sive, this is not nec­es­sar­ily good for the econ­omy, but it does help to push in­fla­tion down.

We can dis­cuss the point to which the in­ter­est rate should be raised. Ex­perts are hav­ing heated de­bates about that: some say that it’s not work­ing, while others say it is. I think this mech­a­nism does work, even if not as ide­ally as it does in de­vel­oped coun­tries.

Why is the in­fla­tion rate go­ing up?

— It’s an im­por­tant ques­tion that is looked at from dif­fer­ent per­spec­tives. The Cabi­net of Min­is­ters and a num­ber of ex­perts be­lieve that prices are grow­ing for ob­jec­tive rea­sons, not as a re­sult of the Gov­ern­ment’s de­ci­sion. These ob­jec­tive rea­sons may in­clude grow­ing prices for the goods we im­port in the world, the grow­ing price of gas or oil, ris­ing ex­ports to the EU which pushes do­mes­tic prices up to the EU level, the in­crease of util­ity rates and many others. These fac­tors can­not be con­trolled by the Gov­ern­ment.

Ac­cord­ing to an­other per­spec­tive, when­ever the Gov­ern­ment raises pen­sions or salaries in the pub­lic sec­tor be­yond the level which the econ­omy can af­ford, the prob­lem emerges.

On the one hand, higher salaries cre­ate proper in­cen­tives for civil ser­vants and at­tract smart peo­ple to the pub­lic sec­tor. On the other hand, we spend more than we can af­ford on the state level.

Some ex­perts be­lieve that so­cial spend­ing is grow­ing faster than the econ­omy does, so the Gov­ern­ment’s ac­tions, such as the in­crease of pen­sions or min­i­mum wages, pro­vi­sion of sub­si­dies and list­ing hand­outs in the bud­get, drive ex­pected in­fla­tion rates up.

Re­gard­less of which per­spec­tive is ac­cu­rate, the NBU re­sponds to the sit­u­a­tion by rais­ing the in­ter­est rate. This will have a neg­a­tive short-term ef­fect on the econ­omy and a pos­i­tive mid-term ef­fect on in­fla­tion.

Which per­spec­tive do you stick to?

— I’ll be diplo­matic: I’ve heard dif­fer­ent es­ti­mates. For in­stance, the in­crease of min­i­mum wages partly drove the econ­omy into the shadow as peo­ple switched to In­di­vid­ual En­tre­pre­neur sta­tus, and con­trib­uted to in­fla­tion pres­sure. The fig­ures on the pen­sion re­form I have seen show a se­ri­ous bur­den on the bud­get. Many pro­grams funded by the state also have a neg­a­tive im­pact. How­ever, I also agree with the idea that ob­jec­tive fac­tors ex­ist which the Gov­ern­ment can­not con­trol.

In fact, the fun­da­men­tal fac­tor is the un­der­de­vel­oped econ­omy. This raises ques­tions to the Cabi­net of Min­is­ters, the NBU, the Pres­i­den­tial Ad­min­is­tra­tion and politi­cians — have they done ev­ery­thing pos­si­ble to make sure that the econ­omy de­vel­ops? It is safe to say that their ac­tions have led to the cur­rent sit­u­a­tion. They could have con­ducted re­forms more ef­fec­tively, fo­cus­ing more on struc­tural changes and on mak­ing the econ­omy more com­pet­i­tive, and less on po­lit­i­cal squab­bling with each other.

Why are re­forms go­ing so slow in Ukraine?

— Re­forms ben­e­fit those who are ready for them. As a re­sult of the changes, the win­ners are those with better ed­u­ca­tion (better pro­fes­sors and uni­ver­si­ties, in­clud­ing in­ter­na­tion­ally); those who ad­just better, and those who have longer life ex­pectancy — the fruit of trans­for­ma­tions come in the future. It makes sense to build an in­fra­struc­ture for the rest to en­able peo­ple to change their qual­i­fi­ca­tions. That’s what has not been done in Ukraine.

This shows the clash be­tween the Gov­ern­ment and the NBU that’s rooted in the fun­da­men­tal con­flict be­tween in­equal­ity and eco­nomic growth. Any pol­icy aimed at macroe­co­nomic sta­bi­liza­tion will ben­e­fit younger and better ed­u­cated peo­ple. This will in­crease in­equal­ity. One of the Gov­ern­ment’s tasks is to de­crease it. In or­der to en­sure eco­nomic growth, we need to build cap­i­tal­ism where those who do a lot re­ceive a lot. This will cre­ate an in­cen­tive to work a lot. Also, this will deepen in­equal­ity — those who have done some­thing will have more com­pared to those who have not done any­thing. As long as so­ci­ety does not per­ceive this in­equal­ity as a fair norm, it will not sup­port cap­i­tal­ism, eco­nomic growth and re­forms that lead to it.

This takes us to an­other ques­tion: is the in­equal­ity we have in Ukraine fair? No. In the 1990s, a hand­ful of peo­ple be­came wealthy in an un­fair man­ner. They did so by cre­at­ing the en­vi­ron­ment for their own en­rich­ment rather than by com­pet­ing fairly. They mo­nop­o­lized mar­kets, con­trolled com­pa­nies, made prof­its on a dis­torted gas mar­ket, set up cap­tive banks, took part in cheap pri­va­ti­za­tion etc. This has led to fun­da­men­tal in­equal­ity where sev­eral per­cent of peo­ple are ex­tremely wealthy com­pared to the rest, but they have not made that money com­pet­i­tively. That’s why peo­ple in Ukraine don’t trust the rich — we see them as en­e­mies, not heroes. In­equal­ity is per­ceived as an un­fair thing in so­ci­ety. This has a com­plex and far-reach­ing im­pact.

Wealthy peo­ple are seen as loyal to those in power. There­fore, there is no con­fi­dence in the gov­ern­ment, and there is a per­ma­nent de­mand for the restora­tion of fair­ness: for “ban­dits in jails”, de­oli­garchi­sa­tion or sim­ply an an­swer to the ques­tion of who killed peo­ple on the Maidan. Ukraine’s lead­er­ship is un­able to meet that de­mand. It needs sup­port and gets none from so­ci­ety be­cause so­ci­ety does not trust it from day one. Un­less so­ci­ety sup­ports it, the gov­ern­ment re­lies on those who do. And who is that? The wealthy peo­ple with re­sources and con­nec­tions.At that point peo­ple say, “sure, we knew they were just like their pre­de­ces­sors and can­not be trusted”. The re­sult is a vi­cious cir­cle: we don’t trust the gov­ern­ment, and the gov­ern­ment is forced to rely on the peo­ple that are the rea­son why we don’t trust it. We’re stuck in it.

Some­one has to re­store fair­ness in a fun­da­men­tal sense if we are ever to leave this point. It doesn’t take putting some­one in jail, shoot­ing some­one or drag­ging some­one to courts for 20 years. Con­struc­tive fair­ness lies in giv­ing peo­ple an op­por­tu­nity to earn money in an hon­est way, in cre­at­ing con­di­tions for that.

An in­crease of pen­sions or min­i­mum wages is a lo­cal so­lu­tion that does not re­ally solve the prob­lem. Even when pen­sions are raised, no­body says “What a nice Gov­ern­ment we have!”. In­stead, we hear, “These losers have given us some­thing at least.” That’s not what nur­tures con­fi­dence. It can only be gained through the restora­tion of fair­ness.

How are the con­di­tions cre­ated to help peo­ple earn money on their own?

— First of all, peo­ple should re­al­ize that ex­pect­ing the Gov­ern­ment to make things work well for every­one, to in­crease pen­sions and salaries, is a way to nowhere. Even if the Gov­ern­ment does raise pen­sions, it will do so through the bud­get. Even­tu­ally, this will lead to higher taxes which is bad, or to higher prices. This means that we will still be pay­ing for the in­crease. Macro­eco­nomics does not al­low gov­ern­ments to sim­ply give peo­ple money from the state. If I’m given money and you are not, I will feel good. If all are given money and all go and buy milk with no new dairy plants built, the sup­ply of milk will not in­crease. We will have to im­port it from Poland, it will get more ex­pen­sive and hryv­nia rate will col­lapse.

If only Ukraini­ans re­al­ized that they can­not ex­pect any­thing from the state, they would slowly start look­ing for ways out. Some are re­ally good at knit­ting, so they can turn it into a small busi­ness and sell things on­line. We don’t see this in Ukraine be­cause no­body in­structs peo­ple about ways to cre­ate a small busi­ness plan or get an in­di­vid­ual en­tre­pre­neur sta­tus.

What would it take to grow an Ap­ple or Ama­zon in Ukraine?

— There is one sim­ple recipe for cre­at­ing an Ap­ple. You should not be afraid to do busi­ness. When you found a new com­pany,

you will in­evitably vi­o­late some­thing be­cause you have not done any­thing like this be­fore, or be­cause you are in­tro­duc­ing in­no­va­tion that is not yet reg­u­lated. Trad­ing in bit­coins or cod­ing blockchain are good ex­am­ples. There is no reg­u­la­tion for this yet, so the SBU [Se­cu­rity Bureau of Ukraine] can come by and say that you are spon­sor­ing the“Donetsk Peo­ple’s Repub­lic ”. That’ s where change has to take place. Law en­force­ment au­thor­i­ties should not put pres­sure on small and medium busi­nesses that do in­no­va­tions. Not pay­ing all the due taxes is still better than be­ing in­tim­i­dated. How many peo­ple try to do some­thing but are scared away? This gets into the news and makes others think, hey, I won’t even try. Peo­ple have to read news about others com­ing up with ideas, trans­form­ing them into a le­git­i­mate busi­ness and sell­ing it to the Sil­i­cone Val­ley through an IPO, not about the SBU com­ing to a com­pany and with­draw­ing all of its servers*. Peo­ple will not try to cre­ate any­thing here for as long as they read about the SBU in the news.

It’s like sports. When every­one reads about Dy­namo and Shakhtar, every­one loves foot­ball and plays it. This leads to a se­lec­tion of tal­ents who grow into strong play­ers. That’s how busi­ness should work too: every­one should try and do busi­ness while the sys­tem and mar­kets will se­lect the best ones. For now, no­body wants to do it be­cause they will be at­tacked for merely start­ing to act as a busi­ness­man. It should be the other way around: vi­o­la­tions should be for­given even if they do take place at times.

Some do not ex­pect any tranches of fund­ing from the IMF up un­til the end of Ukraine’s pro­gram with it. What awaits Ukraine in a sit­u­a­tion like that?

— I think that Ukraine will then lack the money to pay its for­eign debt. This will lead to high in­fla­tion and an eco­nomic cri­sis. Or the Gov­ern­ment should bor­row in for­eign mar­kets which will in­crease the debt bur­den for future gen­er­a­tions. This is a no-win sce­nario.

We can meet the IMF’s con­di­tions and get the next tranche. The first con­di­tion is the es­tab­lish­ment of an Anti-Cor­rup­tion Court. The sec­ond one is an in­crease in gas prices to meet the in­ter­na­tional mar­ket rate. It’s very im­por­tant that gas price in Ukraine gets to the Euro­pean scale. This is dif­fi­cult for peo­ple, but this is also about our en­ergy in­de­pen­dence. Mar­ket prices will en­able com­pe­ti­tion where no­body will tell us: I’m clos­ing the gas tap for you in the cold­est time of the year.

The gas tar­iff sit­u­a­tion is even more dif­fi­cult. The Gov­ern­ment has pledged to es­tab­lish it based on a cer­tain for­mula. It is now say­ing that the for­mula is un­fair and in­ac­cu­rate. Even if we as­sume that the Gov­ern­ment is right, how do our western part­ners see this? If the Gov­ern­ment has com­mit­ted to that for­mula, it must have been in­com­pe­tent, or it does not want to stick to its prom­ises now. The Gov­ern­ment is say­ing that it pro­tects the rights of the pop­u­la­tion. Then why is this pro­tec­tion se­lec­tive, and why is there no fight against cor­rup­tion, shadow econ­omy or clean­ing up of the tax sys­tem? What is hurt­ing peo­ple more – cor­rup­tion or high util­ity rates?

If Ukraine was cleared of cor­rup­tion, peo­ple could be mak­ing more money. Or taxes could be low­ered – then peo­ple would have dif­fer­ent salaries and could af­ford more ex­pen­sive util­ity ser­vices. Clearly, the PM of­fice can­not over­come cor­rup­tion overnight. It takes con­sis­tent work. Screws should be tight­ened to re­move the ben­e­fits of shadow deal­ings. Part of this work is about putting the break­ers of new rules in jail. But new rules have to be cre­ated too, and this can­not be done overnight.

There is a lot of talk about la­bor mi­gra­tion from Ukraine. Can any­thing be done to min­i­mize it?

—Why are peo­ple leaving? They have noth­ing to do in a coun­try th a t’snot­fair. Sothey­will­leave. If fair­ness is re­stored, peo­ple stop feel­ing sec­ond-rate and have some­thing to do here, they will prob­a­bly stay. It’s eas­ier to cre­ate a startup in Ukraine than it is in Poland. You can try and build some­thing here, be­come an owner of it. There, you will only be an em­ployee.

The fact that Ukraini­ans are leaving is not the end of the world. I lived abroad for 18 years, get­ting my de­gree there, writ­ing an­a­lyt­i­cal and aca­demic ar­ti­cles, mak­ing a ca­reer, and see­ing how peo­ple work and study there. Some of this may be help­ing me do some things better in Ukraine to­day. Those who have not re­turned are trans­fer­ring money here and some­times com­ing to de­velop busi­ness with lo­cal part­ners. So there is noth­ing bad about it.

This prob­lem af­fects the macroe­co­nomic and de­mo­graphic di­men­sions. When peo­ple, es­pe­cially the young ones leave, who will work and pay taxes to cover de­cent pen­sions? If we can­not keep Ukraini­ans in the coun­try, we should open up to the coun­tries where life is worse than it is here. We are a racist so­ci­ety that doesn’t like any­one but Ukraini­ans and white peo­ple. We re­fer to peo­ple of other races as beasts, ba­n­abaks, blacks and so on. I think that this is un­ac­cept­able, but that’s our reality. And that’s a huge shame: we are not open to other peo­ple and new ideas.

What’s the sense of the fight against racism and for di­ver­sity over­all? Di­ver­sity brings di­ver­sity of ideas. It makes it more likely that a good idea comes up; it means tol­er­ance for new per­spec­tives, fewer con­flicts, more ex­change of in­for­ma­tion, better net­work­ing, brain­storm­ing, econ­omy and life for all. While we spend our time squab­bling over whether we should be on the right or on the left, peo­ple are set­ting up a new Google.

There­fore we can’t curb mi­gra­tion di­rectly. We can’t set up a fence on the bor­der. This is bad be­cause emi­gra­tion from Ukraine is at the point where it raises a fun­da­men­tal ques­tion: who is Ukraine for? If Ukraine is for the Ukraini­ans who think that life here is bad, maybe it’s better for them to leave? Think of a child who will spend a life­time work­ing as a clerk for USD 300 per month, or can get lucky, go study abroad and make USD 50,000 per year? On a fun­da­men­tal level, is it better to not let the per­son do that?

Can Kyiv School of Eco­nomics con­trib­ute to solv­ing the emi­gra­tion prob­lem?

— If we are given land or a cam­pus – I mean pri­vate cap­i­tal, not just state fund­ing – we will eas­ily cre­ate an in­cu­ba­tor for small and medium busi­ness. We will do this on a na­tion­wide sys­temic level be­cause we know how to do this.

We use the re­sources we have avail­able to cre­ate a pro­gram for ATO veter­ans, teach­ing them to make busi­ness plans for an own busi­ness. I think we will launch it in March. We have many other short-term en­trepreneur­ship pro­grams and an MBA, so we’re help­ing peo­ple set up their own busi­ness.

ANY POL­ICY AIMED AT MACROE­CO­NOMIC STA­BI­LIZA­TION WILL BEN­E­FIT YOUNGER AND BETTER ED­U­CATED PEO­PLE. THIS WILL IN­CREASE IN­EQUAL­ITY.

ONE OF THE GOV­ERN­MENT'S TASKS IS TO DE­CREASE IT

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