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"We are obsessed with economy unshadowing"—Dmytro Natalukha, Chairperson of the VR Economic Development Committee

Dmytro Natalukha. Photo: Freeze frame of the video of the party Servant of the People

Dmytro Natalukha. Photo: Freeze frame of the video of the party Servant of the People

In the course of a conversation with Dmytro Natalukha, the Chairperson of the Verkhovna Rada Economic Development Committee, The Page asked about Ukraine's economic policy priorities, economic incentives, taxes, and so forth. The keynote was pragmatic economics.

According to the textbooks, the economic policy of the state is a set of political, social, economic, and legal measures aimed at developing and optimizing economic processes. Optimization should be carried out according to some criterion. Is there such a criterion for the current Ukrainian state?

– I believe that the main criterion is simple—creating added value. In fact, Ukraine is currently the target of a hybrid economic offensive. Its first element is the covid pandemic that is hitting businesses and the economy as a whole. The second one is the price of energy resources. The third one is the concentration of Russian troops near the Ukrainian border that results in panic, followed by the outflow of investments, etc.

Why are we still coping with these conditions? Exclusively due to high prices for the main export Ukrainian goods. However, these export items are commodities, the prices for such goods are very volatile. And as soon as prices start to fall—this may happen as early as the end of this year—we will again go into dive.

A simple conclusion follows from this—in order to be less dependent on the external price environment, it is necessary to develop domestic production and strive to shift the economy from a commodity model to generating added value.

The second optimization criterion is job creation. If there are few attractive jobs in the country, then two risks arise: an increase in unemployment and an increase in labor emigration. When borders are opened after the pandemic, we will have cosmic labour outflows. And keeping a job is much cheaper than creating a new one. But the state should now help businesses to keep these jobs.

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What has worked and what has not

For such help, in your opinion, what has already been done, and what has yet to be done?

– On the positive side, I can think of restarting the institute of industrial parks. They are a good instrument for developing businesses of various types and sizes. After passing the basic law, we see great interest in creating such parks, and relevant documents are being prepared. The investments claimed amount to hundreds of millions of dollars.

Through investment parks, the state and local communities can win competition for foreign and domestic investment. Businesses that have become the park residents get favorable working conditions and can plan their work for the long term.

The second example is the localization law. This principle will begin to be applied in 2023, but even now we can say that this is in some way a landmark decision. What is the gist of this law? If, for example, the city of Kyiv buys 100 trams, then 30 of them should be produced by us, or 30% of the contract value should come from Ukraine. This will result not only in the loading of domestic producers, but also to the transfer of technologies.

As for statements that foreign manufacturers will not cooperate with us under such conditions, since Ukraine is of little interest to them, I consider it nonsense. For example, the French company Alstom signed a large-scale contract for the supply of locomotives exactly with the condition of significant localization.

Localization would ideally work with indicative planning. If the government would prioritize several sectors for support that create the greatest multiplier effect in the economy.

The government has been talking about this for several years...

– I have been talking about this since 2019. Over the past two years, we have had four Ministers of Economy. When they change every six months, it is impossible to talk about systemic work in principle. It turns out that the only more or less continuous bearer of economic ideology in the country is our committee. But we do not make managerial decisions. This situation is strange to say the least.

Let's get back to what we haven't been able to do yet.

– The main bad thing is the sluggishness of our tax policy. For example, from February 1, Poland reduced VAT to zero on a number of bulk goods and services. So far, this measure has been adopted for six months, but the authorities do not exclude its extension until the end of the restrictions related to Covid.

Not only the domestic consumer in Poland benefits from this. A strong instrument has been created to strengthen the position of their exporters, who can reduce prices for their products. Polish imports in Ukraine will put even more pressure on the domestic market if we do not take some countermeasures.

Recently, Russia, the world's largest producer of ammonia, banned its export. And this product is the most important commodity for producing fertilizers. This means that they will rise in price, and crop production and food products will follow the fertilizers. And all this amid rising gas prices.

In such circumstances, tax policy should be as flexible as possible. Now it is rigid and ossified, unable to support business in the face of those three external factors that I spoke about at the very beginning. We urgently need to initiate a review of approaches to tax policy.

It is impossible to change tax policy without at least a temporary increase in public debt. There's no reason to be scared of it. Now in the world there are economically successful countries with a huge share of debt to GDP (and this is not only the United States), but there are outsiders whose share of debt is less than Ukrainian one. Now the NBU and the Ministry of Finance are saying that the share of debt should not be allowed to increase. I believe that the only question is how professionally the state manages its debt.

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On the need to protect the national economy

How do you assess structural changes in the economy?

– Since 2014, we have been forced to radically change the structure of the economy, due to the fact that we have lost the industrial and tourist regions, to a large extent—the largest sales market. In recent years, the financing of state budget expenditure items related to the defense sector has grown significantly. In 2020, Covid was added to this.

In my opinion, since 2008, after the global financial crisis, the whole world began to change dramatically. With the pandemic, these changes have become apparently irreversible. Former economic institutions, principles, mechanisms, and models are no longer capable of ensuring not only development, but also the sustainable existence of economies.

Ukraine has socially critical industries: dairy, meat, etc., which are now experiencing a colossal burden and impact from imports. Can we keep talking that we will comply with the requirements of the parity opening of markets, as written in the Association Agreement with the EU? Or do we need to honestly tell our partners that we have an economic force majeure, moreover, starting from 2014, from the year of signing the economic part of the Agreement? We cannot pretend that we have remained in the same conditions that we had. And act as if nothing has changed, that the competitiveness of our industries has not worsened for objective reasons.

I am sure that for a certain period of time we must take protectionist measures, protect a number of our industries and producers, because the quality of life of our citizens depends on this. Without this, the situation will only worsen.

Recent external factors have shown how weak and unstable to external challenges our country's economy is. If we do not begin to change the taxation system and approaches to the economy literally now in the hope that the threat of war and the coronavirus are about to weaken, this will be a crime.

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Do you find receptive audience in the Ministry of Economy?

– After our interview, I'm going to a closed meeting at the Ministry of Economy, where I'm going to touch on this topic. I want to ask, are they doing everything as usual, or are they taking some atypical measures related to the gravity of the current situation?

Another topical issue is an Agreement on a free trade zone with Turkey that we are going to sign shortly (the conversation took place on the eve of this agreement signing—Note by The Page). I believe that in such matters it is impossible to be "for" or "against". Any action in the economy must be assessed from the point of view of the strategic nature of its implementation. Otherwise, we will get the situation of 2014, the year we signed the economic part of the Association Agreement actually with our eyes closed. Politically, the choice to move to the EU was the right step. But the economic bloc, in my opinion, has done us more harm than good. However, now we cannot stop fulfilling the terms of the Association Agreement just like that.

The same is with the "Turkish" agreement. We cannot sign it just because it is beautiful, someone likes it, or we were asked to do this. The main criterion is Ukrainian interest. If we see that some of our industries are suffering from this, then we must understand how we immediately defend ourselves, whether these measures will be challenged, whether we have enough resources for the protection. If not, then negotiations should continue.

The last time I saw the main points of the agreement with Turkey was about a month ago. In that form, in my opinion, it could not be signed. Perhaps since then the government has agreed on something else.

Do you have a mutual understanding with colleagues from the VR Finance Committee on tax policy issues?

– To put it mildly, we have a process of complex discussion (smiles). This is fine. Any financier thinks how to find money, and an economist thinks how to spend it. The conflict lies in their functions.

I understand the position of my colleagues from the Finance Committee, I hope they hear my reasoning. In my opinion, in matters of taxes, we are too rigid and too unforeseeable, unpredictable, and one-sided.

We are obsessed with the economy unshadowing. Yes, it is important. But this does not boost economic growth. In no country has rapid growth been related to the economy unshadowing. We are trying to convey this idea to our colleagues, but so far it is not working out well.

Economic growth also requires regulation reduction. What do we have here?

– There is good progress in terms of process digitalization. The Ministry of Digital Transformation has already done a lot and continues this important work for business.

However, we cannot say that we have more economic freedom or that doing business has become much easier. But judging by my interactions with the representatives of business associations, they do not strongly insist on this. The main thing for them is the judicial system reform. They believe that if they have disputes with the state, they will definitely lose in the courts, regardless of whether they are right or not. And the corporate conflict will be resolved in favor of the side with more money.

Therefore, business often seeks protection from the business ombudsperson and parliamentary temporary investigation commissions—that is, resorts to the instruments alternative to court.

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On pragmatism in economics

In your texts and speeches, you sometimes use the term "pragmatic economics". Explain what this pragmatism is?

– There are people of left ideology, right or centrists. But when we make economic decisions, ideology should be the last factor. The state should be as flexible as possible in the economy. If Ukraine clogs the shelves of some country with its products, and they start taking protective measures there, we should be as liberal as possible and demand a free market and competition. But when we see something similar in our own country, that imports destroy domestic production, we are forced to be protectionists. The question is not about what kind of milk, for example, we drink. But about what happens to cows—cows go to slaughter—households in villages lose an important resource—animal husbandry decreases, etc. For some reason, such chains are not always thought through to the end.

Therefore, we need to be as pragmatic as possible in the economy, to proceed from the interests of the country, and not the postulates of any ideology. Following the framework of ideology deprives us of the instruments that are most effective in a particular situation.

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