Some questions asked

An anonymous commenter has asked some questions that ought to be talked about. He/she may have meant them to be rhetorical but they are important questions nonetheless.

Increased investment would be great as well as Ukraine being a member of WTO. That being said it does matter who eventually benefits from the investment and more foreign owners will generate jobs

- hopefully more people will stay in the country as more jobs are available

People will stay. The reasons they are leaving is for the money. Some of the advertising here takes advantage of this. One subway poster for a company that allows for wire transfers of money is split into two panels. On the left is a woman setting a table--a waitress? a domestic?-- with a smile on her face. On the right is a young fellow sitting in what is obviously a college class looking rather wistfully--or is his look uncertain? "will it get here in time?"--into the camera. It's all about the money.

The question though is whether the diasporists will come back when things begin to pick up. Maybe if it reaches European levels, maybe. But you have to figure that people get their lives oriented a certain way and get set somewhere and that has to make it difficult to come back.

The big elephant in the room in all this is the movement of people from the villages to the big cities. Ukraine is one of the most rural countries in the world. Lots of people live in villages and there is a kind of culture linked to it. Everyone in the big city has someone they are related to or know who lives in the village. That has been an advantage in allowing them to eat during the bad times because they have had access to the produce of the village from those links.

The problem is that the villages are dying. There is no opportunity for the young people there, no business other than agriculture for them to be involved in. And the agriculture is monopolized by what are often no more than the old party bosses or the new capitalists that are indistinguishable from the old party bosses, who are farming the land non-productively and taking the cream for themselves. They just limp along providing nothing for the young to get involved in and no real economic benefit for the community.

And for those of us who are looking for ways to make the villages more productive, we are faced with three facts that stand in the way, booze, apathy and theft. A lot of village men spend a lot of time either drunk or looking for a drink. That gets in the way of doing something productive. In one village I am aware of, the men got together to set up a fishing business. They would stock a local pond with fish and charge for fishing. I was asked to invest but couldn't see how it would be an economic benefit for the community, how it would generate money and create jobs. The only people I could see who would want to fish there--at the equivalent of the local fishing hole--would be locals, the same people who need businesses to come in so they can have jobs to make money and provide opportunity for the young. This sort of arrangement didn't make the economic pie bigger, which is what is needed, it just rearranged it.

But they went ahead without me anyway and set it up. They sold their memberships to locals, about 72 of them representing most of the male population of the village. And they stocked the pond. Now, on a lot of days, you will find men getting up early to go fishing. They make their way down to the pond and fish?--no, they spend it drinking with a line dangling in the water. And they leave their wives home to work the land and harvest the crops.

Now I have heard that all the fish have died from some kind of a disease. It's hard not to say that it serves them right. But it does.

What will happen is that the young will leave for the big cities leaving the old for the villages. It is happening right now as a matter of fact. When these elderly villagers die off, that will be it. And the link between the village and the city, a link that saved many lives in Ukraine I am convinced, will be severed.

The cities will be hard pressed to deal with the influx of people. Where are they going to live? Housing prices in Kiev have skyrocketed the past couple of years making it unaffordable for a lot of people. They might be able to rent a room here or there but there will be a shortage of places to stay. In Latin America, the problem is solved with shantytowns, slums on the outskirts of town or up in the hills (Caracas.) Might be what Ukraine is faced with. I hope not.

Of course, the decline in the birthrate might solve some of this problem. But it will create another. Who will be around to generate the economic activity needed to take care of an aging population?

-but will the wages be livable?

They aren't livable now. The fortunate thing is that virtually no one is carrying a mortgage payment and energy rates are low and produce comes in from the village--the above linkage. But energy rates could rise to more European levels and that would affect a lot of people. One economist said that if that happened in Russia and mortgages became a much more accepted and common thing, people would be forced to mortgage their flats to pay for their energy consumption. It would put everything at risk. Something like this could happen here.

Western companies pay higher wages here and they provide better benefits on the whole. The low wages and poor working conditions have come on the Ukrainian watch. Incredible wealth has been amassed by a select few while the rest of the people have been scratching out some sort of existence at the wages offered by the companies of these moguls and "entrepreneurs." Looks like feudalism dies hard.

For Western companies, you can't oppress your workforce and end up with anything productive. That may be in their self-interest and nothing to canonize them about. But it does benefit the employee. And there is some conscience involved in this with some. Some people don't surrender their humanity just because they get involved in business.

and the owners will be the ones who ultimately benefit and will they invest in the country (spanning the spectrum from philanthropy to Gucci stores) or will it end up elsewhere?

Privatization in Russia and Ukraine meant capital flight and it still does to some extent. Most of the Western advisors promoted the idea that state companies should be in private hands-- any way they could get there was fine. The argument (and major assumption based on Western cultural perspectives, I might add) was that the owners would take care of those assets, invest profits back into them and lift all boats as a result. That didn't happen. The companies were stripped of profits and the money sent offshore. And the people were impoverished. Needless to say that that wasn't useful.

I think the economists had to invent a new stage of development to account for it. Milton Friedman said that he had been one of the loudest with, "Privatize, privatize, privatize!" He now says he was wrong, it should have been, "Rule of law, rule of law, rule of law!" He still has it wrong. It should have been, "Culture, culture, culture!"--a much different problem.

Western companies are profit focused. They will reinvest and that will improve things. Again, it is in their interest to do so, their long-term financial interests to do so.

what about taxes?

Taxes will be paid. It creates too much risk to not pay them and companies don't like that kind of risk.

The real problem is to make sure that the tax system, including collection, is transparent and fair. Tax inspectors here have had a lot of power and corruption is rife among them. It has been common to get a visit from an inspector who holds his hand out, so to speak, as he tells you that you owe more than you have paid. These arrears have a tendency to disappear when the hand is filled...or not if you are a political opponent or someone in the way of a powerful financial interest.

Businesses tend to understate profits to avoid the risks this presents. So they end up keeping two sets of books, one for the inspectors and one for the business itself.

Yuschenko has made tax policy a focus of his administration and rightly so. He wants to entice businesses back to paying their taxes by overhauling the tax administration and making taxes simpler and fairer. That will help a whole lot. He has done some things and is working on others and there is already evidence that what has been done is working--tax revenues are up.

Good questions.