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Why is industrial production declining in Ukraine?

Sergiy Lishchyna

The situation Ukraine has faced over the last six months shows that the new government doesn't have a priority of building a strong Ukrainian business and a powerful national industry.

It's the fifth month in a row of the production output decline. According to forecasts, by the end of the year, it will have reached 4%. In some industries, it has reached a record level. For example, in metallurgy, the decline is 3%. It's the worst result in 20 years.

The idea of an investment nanny is one of the most vivid proofs. Let me remind you that at the World Economic Forum in Davos, Prime Minister Oleksiy Honcharuk said that every foreign investor would be represented by a special official ready to solve investor's problems. Almost immediately, Ukrainian entrepreneurs present in the room disagreed with the Prime Minister and proposed to treat any investor equally, especially the domestic one.

Cause and effect

In short, the Ukrainian business has to solve new problems every new day, as the state does not form any economic policy. Under such conditions, producers cannot make a proper contribution to economic growth, so often discussed in the Cabinet of Ministers.

Ukraine is a rather poor country. Its future depends on whether or not it can escape poverty. To escape, we need a reasonable state economic policy. For example, one like has been introduced in South Korea, Taiwan, and, in recent years, China.

In liberal economic circles, everyone laughs at authors like Erik Reinert, who actively advocates the protection of home industries. But in fact, reasonable protection of home industries prevails in the world. Local investors stay protected, and no one chases foreign investments.

Before inviting an investor, it is crucial to understand what these investments will offer the country. The elites of prosperous countries consistently stimulate national business. First of all, it is tightly intertwined with the state and, therefore, holds the country's interests at heart. At the same time, the government creates conditions (both whip and carrot) for national businesses to move towards high-tech industries, those with maximum added value.

Of course, the state usually fights hard against cartel agreements and prevents the formation of monopolies. Encouraging foreign investment is beneficial only when the investor brings technologies with high added value to the country on condition that the national business can adopt these technologies with time.

A sizeable foreign investor can be harmful in traditional areas where the national business is quite capable of functioning. After having received assistance, large global companies destroy domestic manufacturers through dumping. Then they can endlessly exploit the country's economy for their monopoly position.

There are many examples of countries where entire industries are hostages of several global companies that create nothing unique. They just take advantage of their monopoly position. For instance, Poland granted significant privileges to foreign companies in the 90s, which led to the exclusion of national businesses from the profit-making industries. Since then, international companies receive super-profits there, while the furniture industry is forced to buy expensive components and can survive only due to cheap labor from Ukraine. At the same time, Polish people continue to leave their country in search of a better life.

Similar processes are taking place now in Ukraine. The same companies enter the Ukrainian market. They often "inflate" the volumes of their investments to get maximum support from the authorities. Such actions lead national producers that work without support and understanding of the state to a dead end. If such inconsiderate policy continues, domestic business, along with the whole country is going to suffer. Once again, the state that does not need a healthy and prosperous national business will always be poor, weak, and also an object (not a subject) of global politics.

Another example of the absence of a state functioning is economic relations with Belarus, which acquire signs of a large-scale financial disaster. The Belarusian economy is not a market economy. It is controlled by the state, while the regime of Alexander Lukashenko subsidizes Belarusian exports.

Russia consistently cuts benefits for the Belarusian economy and, consequently, the foreign trade balance is worsening. So, Belarus' solution is large-scale dumping of its goods on the Ukrainian market.

Many industries have been under tremendous non-market pressure.

The Ukrainian government is silent while the situation is getting worse every month. Needless to say, how other states protect their markets from the unfair competition (let us recall at least the actions of US President Donald Trump towards China).

Strange investors

Another example is the attitude of Rivne region authorities to Kronospan. This company has announced its plan to build a plant in the region.

And not a single person in authority asked themselves a simple question: what kind of investor came to the region and how he recommended itself earlier. Are there any claims to the company from tax authorities in the countries where it worked? Does Kronospan take care of the environment everywhere? Does it have any problems with environmental protection? Honest answers to these questions will be complicated for the company. And they will not show the company at its best.

But that's not the point. The point is that Kronospan gets full support in the Rivne region. The local authorities are fussy about it like a hen with one chick. Meanwhile, several similar Ukrainian enterprises working nearby will be forced to close down and leave the market in case of opening another production facility. It's not about new taxes and jobs, but about cannibalism in its purest form. Alas, the state promotes it.

The Ukrainian investors have been surviving in their own country throughout the past years. But the state takes care of and creates conditions for foreign businesses by killing domestic producers and by enforcing unequal conditions on them.

The facts given above illustrate the general trend. In its core, there is an entirely nonfunctional government attitude. Authorities are not smart enough to take care of national investors, but they are eager enough to kneel before external companies, often acting against the best interests of Ukraine.

Losing this attitude is one of the conditions for GDP growth and economic change for the better.

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