The World Market: Microeconomic Impacts

The total trade turnover with non-NIS in 1992 was worth 5,981.9 million USD (exports of 3,840.2 mln. USD and imports of 2,141.7 mln. USD). While the majority of exports went to China (679.7 mln. USD), Czechoslovakia (421.3 mln. USD), Turkey (323.1 mln. USD), and Italy (282.3 mln. USD), the major imports were from Germany (246.6 mln. USD), Italy (217.9 mln. USD), Czechoslovakia (198.2 mln.

USD), and South Korea (194.8 mln. USD). The share of barter trade was 37.2% in export and 28.8% in import. The geographical distribution of total non-NIS trade in 1992 was as follows: Europe (43.7%), of which Italy (6.8%), Germany (6.3%);

Asia (32%), of which China (15.5%), Turkey (6.4%); Africa (1.8%); SouthLNorth America (2.5%); Baltic States (20%), of which Latvia (1 l.2%).[4]

During 1992, credit agreements for a total of 1.9 billion USD were signed with the governments of Germany, Canada, and the USA. At the end of 1992, already 650 joint ventures were operating in the Ukraine and their share in export was 5.7%. As many as 3,340 cases of foreign investment were registered for a total amount of approximately 900 million USD.[5]

After officially leaving the ruble zone, the exchange rate of UAK to USD was determined on the basis of cross-rates between the currency rates of ruble to USD and ruble to UAK. The lack of rubles and domestic currency reserves in the Ukraine allowed the UAK rate to fall dramatically. The most substantial drop in the rate was just immediately after official introduction of Ukrainian karbovanets in mid- November 1992: the rate fell to 50% of its initially quoted value. Subsequently, the Governmental decree on currency regulation was introduced at the end of March

Microeconomic Preconditions for Macroeconomic (1n)Stability 177 1993, obliging exporters sell to 50% of foreign currency revenues on the currency exchange causing a further drop in the exchange rate.

Trade with non-NIS countries and the dramatic change in the exchange rate relative to USD substantially influenced enterprises, managerial behavior, and microeconomic optimization for the following reasons:

1. The difference between domestic and world prices stimulated enterprises to increase exports.

2. The export structure, in which more than 90% are raw materials, fertilizers, metals and other basic products, was not conducive to economic growth.

3. The export revenues of enterprises were not effectively used for investments and innovation. At the same time, the supply of imported consumer goods forced inflation to rise. For some products such as cigarettes, liquors, coffee, tea, and electronics, the high quality import products are 'price leaders'.

4. Domestic producers of electronics, TV sets, computers, and machinery were no longer competitive and struggled to survive.

5. The industries, agriculture, and services, which had imported much equipment, raw materials, and spare parts, were faced with currency limitations and have been collapsing. For example, the city transportation is worsening because local authorities have no money to buy Czech trams and trolleys and Hungarian buses or spare parts for them.

6. Some industries, for example, TV sets, electronics, and machinery, have main- tained a high level of cooperation with NIS and others. The rule to sell 50%

of currency revenues was also applied to the Russian ruble. This severed cooperation and tended to cause further industrial decline.

7. The declining exchange rate has increased the cost of production and propa- gated inflation.

8. The imported equipment recalculated in UAK but based on the high exchange rate of the USD could have rapidly increased the enterprises' capital. In such cases, the cost of existing and newly imported equipment became mutually incomparable, the high price raising depreciation cost and the general cost level while decreasing labor productivity and profitability of enterprises.

9. The decision-making concerning currency investment credits have been made on the basis of old, Soviet-style, production-oriented approaches, without adequate market research and project management. Thus, the repayment of investment credits has been increasingly considered in mainly a formal sense and, while it has already contributed to the worsening of the contemporary problem of payment balance for the time being, it may generate inflationary pressures in the future.

178 Y Shevchenko Price dumping by exporters, the large share of barter trade in total trade, the overpayments for imported equipment, and other forms of 'destructive' incentives for export-import activities of enterprises continued in the Ukraine throughout the first quarter of 1993. In Russia, the package of governmental tariff and non- tariff regulation of foreign trade was implemented at the beginning of 1993, which more effectively stimulated the drive for export efficiency and assured the financial interests of the state.

It becomes obvious that the effort needed to achieve microeconomic optimiza- tion must now be based on institutional changes. Ownership must be restructured in order to constitute a new market structure; a type of market environment for the enterprises that is conducive to competition. Unfortunately, the institutional changes in the Ukrainian economy have been insufficient and contradictory. For example:

The anti-monopoly law was adopted and the anti-monopoly committee subordi- nate to the Ukrainian Parliament was established but, in reality, anti-monopoly regulation could not be considered visible or effective for the implementation of reforms. The government has used the level of profitability of monopolies as the indicator for monopolistic activities;

In January 1993, the Ukrainian government adopted a decree on renewing the right of the ministries to operate as owner of state assets and state companies' property. At the same time, enterprises lost the right to be co-founder of joint- stock companies, joint ventures, or to establish affiliated companies. Such rights were transferred to the ministries and the State Property Fund;

The right to make decisions regarding the leasing of the enterprise funds was transferred from the employees unions to the State Property Fund;

In 1993, the corporatization started leading to large-scale privatization.

As a consequence of the last points, all general managers of enterprises were subsequently dependent on personal contracts with ministries, and their wages will eventually depend on a fixed sum plus some bonus upon fulfillment of the planned results for output, profitability, and utilization of funds. In addition, managers' decision-making became limited in different ways. For example, in order to travel abroad, the responsible minister must have written permission from the Cabinet of Ministers, and the enterprise general manager - managers faced even more strict and complicated regulations.

The restoration of former (ministerial) branches of managerial hierarchy has protected government property from utilization for private interests, as it was of- ficially explained. Yet, this is severely limiting the change of enterprise structure

Microeconomic Preconditions for Macroeconomic (1n)Stability 179 and micro-based optimal institutional changes. In combination with other regula- tions, such attempts could not permit financial divorce of enterprises from the state in order to create real economic responsibility of enterprises, and to adjust their interests to market oriented incentives.

The relatively slow institutional changes and the postponement of small pri- vatization and large privatization have not created necessary preconditions for strengthening enterprise budgets. The periodical credit emission for covering inter- enterprise debt simply promoted continued existence of ineffective enterprises, did not limit price growth, and did not induce cost reduction. The move to more ac- tively begin bankruptcy procedures combined with faster privatization, could have initiated the movement toward strengthening enterprises' budgets. Without these measures, one could not expect some turning point in enterprises incentives for cost efficiency and real competition.

9.5 Summary

1. Macroeconomic instability- high inflation, high interest rates - in combina- tion with changes in legislation and taxation have not yet created preconditions for microeconomic optimization in the Ukrainian transformation.

2. The inertia of production/distribution decision-making of enterprises' man- agers, an unstable economic and legal environment, soft budgets of enterprises, and their self-crediting limited enterprise adjustment to the emerging market signals.

3. The economic reforms in the Ukraine and its economy were considerably vulnerable to external factors such as oil and gas supply/prices, trade and pay- ment balance with NIS countries, and the decrease of the Ukrainian currency exchange rate to the Russian ruble.

4. The adjustment to market signals has been complicated for Ukrainian enter- prises because of different trends in three market areas: domestic market, NIS market, and world market. The main problems are derived from differ- ent comparative advantages and competition in each market area, different trends in rates of exchange, and differences in tariff and non-tariff regulations.

Consequently, the enterprises' behavior has been distorted in different markets.

5. The disintegration of the former Soviet Union, the unstable regulations of trade between NIS countries, and the continued interdependence of enterprises as a result of the former system of cooperation and specialization for maximizing benefits for the single economy have accentuated economic difficulties caused by severing economic ties. At the same time, those conditions resulted in

180 L! Shevchenko autarky and protectionism, influencing a combination of regional and structural changes in some cases.

6. The negative payment balance of the Ukraine in trade with Russia and various exchange rates to the Russian ruble originating from different states of the former Soviet Union (FSU) could not stimulate enterprises to increase trade with NIS. So, that the free trade zone would be the most suitable market model for the FSU and a common reserve currency is necessary.

7. The future of economic relations in the Ukraine and other NIS countries depend on the advance of economic reforms in Russia. The political struggle in Russia could lead to growing dependence and uncertainty in relations between states and enterprises.

8. The institutional changes for micro-based optimization are undertaken more slowly in the Ukraine than in Russia. Administrative control over enterprises' property, limits to leasing enterprises, and halting corporatization and priva- tization are the main obstacles for strengthening enterprise budgets and the emergence of market-oriented incentives and decision-making.

Notes

[I] Uryadovy Courier, 10 April 1993.

[2] Uryadovy Courier, 21 January 1993.

[3] Estimated supply should have reached 30-37 million tons. (Uryadovy Courier, 21 January 1993.) The forecasted decline of oil output in Russia during 1993-1995 would cause a contraction of the supply from Russia and necessitate increased oil purchases from the world market. The related expenditures in terms of world prices would be an estimated 5 billion USD annually. In comparison, Ukrainian export revenues i n hard currency was only 3.8 billion USD in 1992.

[4] Ministry of Statistics of Ukraine; data from January to September 1992.

[5] Uryadovy Courier, 21 January 1993.

Chapter 10