There is a long tradition for each new Ukrainian government to vow its adherence to continuation of market reforms. The government of Victor Yanukovych, formed by a coalition of three parties, is no exception. Surprisingly, until now the Party of Regions' economic plans have been one of the major factors consolidating its coalition with leftists. The final goal of the plans - the construction of
a post-industrial society in Ukraine - coincides with the program goals of the Communist Party of Ukraine. And as many have noticed, the economic plans are not specific enough to create tension between coalition members.
According to the Ministry of Economy of Ukraine, to achieve this goal, Ukraine's economy first needs to switch from the current inertial model to a dynamic model of development, called the investment-innovation model of economic development. During next year, there will be substantial increases in the level of public investments in infrastructure and equipment and innovation activities of the public sector. By the end of 2008, administrative, land, anti-corruption, and tax reforms are to be implemented. The government also plans to lower the tax burden and keep the state budget balanced simultaneously. Because the program is aimed to fulfill everybody's dreams, it is difficult to expect that all its components will be carried out.
The plans to have Ukraine moved to a dynamic orbit by the end of 2008 are exciting. The first needs for their realization are huge fixed capital investments. According to World Bank rough estimates, Ukraine needs to spend $100 billion in capital investments over the next 10 years (see Table 1), which cannot be done without the private sector's active participation. Unfortunately, the government's words about lowering the tax burden will remain only words in 2007. For instance, the personal income tax rate will go up by 2 percent, the burden of social insurance taxes by 1.2 percent, the minimum wage by more than 10 percent. It is worth noting that the current combined tax rate for social insurance programs is about 40 percent.
A simple question is whether a higher level of social protection and justice will accompany the planned increase in payroll taxes. The main idea behind the currently used pay-as-you-go system is that workers make retirement contributions today because they expect to get retirement benefits in the future. The fact that the life expectancy for Ukrainian males is 62.23 years means that many middle-aged men will not live long enough to collect any retirement benefits. So raising the pension fund tax rate is akin to committing an act of robbery. Moreover, the higher tax rates will not necessarily lead to larger tax revenues. For instance, after having personal income tax rates drastically reduced in 2003, Ukraine experienced an inflow of tax revenues in 2004. The policies aimed at the demand side alone often produce nothing but economic stagnation.
Many supporters of the coalition economic program use the word "innovation" in a narrow, outdated sense.
As Yuriy Pakhomov, Academician and Director of the Institute of the World Economy and International Relations, National Academy of Sciences of Ukraine, put it in an interview with the Ekonomicheskie Izvestiya (Economic News) newspaper last October, "…in 2004-05 the country could jump to an innovation trajectory of development and growth relatively easily… However, as a result of the Orange revolution and the ensuing disorganization of production processes by the Orange authorities, the chance for a broad-scale modernization was lost. " There is no doubt that innovation is an essential part of the process of catch-up. However, innovation activities differ from making investments in high-technology sectors.
 In the fall of 2004, Ukraine needed institutional innovation most of all. There was a lamentable lack of formal and informal institutions to constrain government to act within the rule of law. From this point of view, it is difficult to overestimate the significance of the Orange revolution. Moreover, as Karla Hoff and Nobel Prize Winner Joseph Stiglitz noted in their 2001 paper "Modern Economic Theory and Development," "…the ability of government to act as an agent of development may depend on the strength of democratic forces." Obviously, the verb "may" has to be removed from the last sentence in reference to the post-communist countries: Democracy is indispensable for curbing public officials' rent-seeking activities.
According to the coalition economic program, public funds will play a major role in facilitating technological innovation in Ukraine. Is the National Academy of Sciences of Ukraine bound to receive the lion's share of the funds? Its role in R&D in Ukraine is special since Ukrainian universities are essentially teaching schools, with professors having an excessive teaching load. So, university R&D expenditures are about 2.5 times lower than the National Academy of Sciences', even though the number of candidates and doctors of science working at universities is as much as three times higher than that in the Academy of Sciences.
In other words, poor Ukraine, unlike the rich United States, finds it possible to keep a huge army of professional scientists whose work consists only of research. Had this army affected the growth rate of the Ukrainian economy positively, Ukraine would have had at least European standards of living by now. O'Henry's Bolivar could not carry double; neither can Ukraine's state budget. Rationalizing the current dichotomy between the teaching and research functions should be a top priority on the government's educational agenda. In most of the rest of the world research and teaching work hand in hand; that same situation could and should work in Ukraine.
On November 6, 2006, Transparency International released the 2006 version of its Corruption Perceptions index. According to it, Ukraine shares the 99th place with Dominican Republic, Georgia, Mali, Mongolia, and Mozambique. Corruption directly attacks innovation because innovators need licenses, permits, import quotas and many other government-supplied goods. Moreover, in developing countries with weak institutions, such as Ukraine, extra public investment often ends up in the hands of corrupt government officials and their cronies. So there is another important precondition that has to be met: Before a surge in public investment, a comprehensive anti-corruption program has to be implemented.
Ukraine's economic future depends on the level of fixed capital investments to a much lower extent than some proponents of the coalition economic program claim. A much more important question is whether there is an environment conducive to investment and innovation in Ukraine. And there is no doubt that creation of such an environment will take more than a couple of years.
Pavlo Prokopovych, Kyiv Economics Institute and EERC MA program in economics at the National University Kyiv-Mohyla Academy. The views expressed are purely the author's.
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