Education+Middle Class: Road to success

When analyzing the evolution of the economy in the last 20 years in the countries of the former Eastern bloc, we see that the countries that have been most successful have been those which, regardless of major corporations,  have created a network of medium and small companies, backed by a population with a high rapid adaptation to new technologies and a great interest in opening to the outside. As a result of this evolution, appeared a middle-class, which is the engine of growth in the country and main responsible of growth in domestic demand. Slovenia, Czech Republic, Estonia, Lithuania as opposed to countries that have not been able so far to establish a middle-class. 

 While these countries have devoted their efforts to create conditions to facilitate that middle-class could create new companies and projects in a supportive, friendly environment with clear legislation, a simplified bureaucracy, infrastructure and adequate security in some countries, we have seen as power groups, the old Soviet /communist burocracy took control of wealthness of the country and have raised a number of structures in place to discourage investment and initiative in the country, which have been blocked, hindered and even extorted.  

 We should not be surprised that some countries in Eastern Europe, as referred before, show much better figures than countries from Meriodional Europe such as Greece or Portugal. Higly skilled populations with strong  willing to face the challenges of what we call  'global economy'.  

 However, other countries have established and attracted investment from big corporations, but have been unable to create a dynamic and open country. As a result, social differences have become larger, the middle- class virtually does not exist, and future growth prospects are much more limited. Romania and Bulgaria, although EU countries,- had all the tools and support for the transition-, today, are clearly not progressing as expected due to problems realted basically to corruption in political and judicial level. Others, such as Belarus or Ukraine, unfortunately, consolidated power structures not interested to develope freedom and democracy and create simple state structures to serve the population.

 This list of 'winners' would place countries such as Slovenia, Estonia, Czech Republic. In a second group could include countries such as Latvia, Lithuania, Hungary, Slovakia, Poland, Serbia, Croatia, Montenegro. Already in another category, for social, cultural, political, historical etc. .. would be a group of countries such as Romania, Bulgaria, Belarus, Ukraine, Moldova, Macedonia, Albania.  In a special category, we would locate Kosovo as 'pseudo-country' controlled by criminal gangs which will obviously in the coming years remain isolated.  
 
 At a time when some people are calling for policies which will mean low wages, less welfare state as a recipe for overcoming the crisis, a look at Eastern Europe shows that only with education, reasonable wages  and strong-efficient states structures, we can expect to have a stable economic growth at mid-term that comes accompanied by an improvement in living conditions of the population of these countries. Otherwise, what shall we need growth of a country for ? 
 
 It is not difficult to forecast that those countries that have adopted the prescription of more education, order, prosperity and less bureaucracy+corruption in the coming years,  no matter international background, will consolidate its model with strong middle classes and stable growth.   

Short and Sharp

I have been out for 5 months...which is actually a lot for a blog. No excuses. I did not write as I really had not much  to comment.

Actually, my general perception of overall situation has not changed. Anyway, I will make some remarks, just for you to be sure that blog is still alive as blogger keeps on breathing.

Regarding Ukraine, I have to say that our worst forecast have been confirmed. Any remarkable change has been introduce in the country, except new regulations which have create an atmosphere of panic and demotivation to invest and launch any new business except for those which are very close to structures of politicial power. Nothing has been done to reduce corruption and private money is not flowing on to the economy but just looking for 'short-term operations' in Ukraine. Some civil works, infrastructure construction is being done to make-up the country before Euro 2012. That should be over in few months. That's all.

  The confidence between consumers, the purchase power has not improved except for those appointed as new 'public servers' in the new administration.I have to say that either Goverment changes it orientation and attitude towards its own people and economical situation or country will continue to slip down towards a dark future. Social, political unrest will damage even more economical growth...and State Budget can not be longer relaying on foreign loans to execute its payments. It has to get income from big corporations which are operating in the country and stop pushing on small and middle size business which is trying to recover after 2009 crisis. It has to control customs as it is not doing ( nothing has changed from previous days ) and has to crack on 'law kaos' as regulations are not enforced and corruption is fully spread in the law system.

  There are some good signs of recovery on construction, on the lower residential segment, where 'cash' operations allow market to be more active than in middle and high class segment which are not showing signs of recovery as financial sector is not providing the required financing for middle and high amount operations.

 Agriculture is showing strongly and investment on this sector, based on the plans for land privatization which this goverment is going to undertake, should allow this sector to show the strongest growth in the country.

 Equipment seems to be sold at good pace to Russia and other CIS countries.

 Anyway, as it is mentioned on the link I enclose above, unfortunately, we can not say that things have improved in terms of  'business friendship' in Ukraine.

http://www.domik.net/novosti/kak-inostrancy-ocenivajut-ekonomiku-ukrainy-n136778.html

As I promised when I started this blog, from now on I will try to focus my attention on other former USSR republics, while Ukraine takes its time to decide to move on the direction to prosperity or it finally consolidates as the eastern border of EU and the 'eternal promised land'.

UCRANIA:FUTURO INCIERTO

  He estado pensando largamente acerca de la idoneidad de escribir este artículo. Sinceramente, se me hace muy difícil escribir en un blog, en mi blog, sin trasmitir a los lectores, aquellos pensamientos que pasan por mi cabeza cuando analizo la realidad de Ucrania.

  Creo que hacemos un flaco favor al país, si miramos hacia otro lado, obviando la realidad. Voy a ser muy claro: lamentablemente, la sensación de todos aquellas personas con las que tenemos relación profesional o personal y que están mas o menos vinculadas a Ucrania, es que el país está cayendo por una rampa hacia no se sabe bien donde.

  Las causas de tal situación son simples de formular y muy complejas de eliminar. La corrupción en todos los niveles de la Administración, común a todos los partidos, la inseguridad jurídica total de las personas o inversiones en Ucrania, colocan a este país en una situación que o empieza a solucionarse en el C/P o acabara llevando al país a la ruina.

 La falta de recursos de la Administración pública, parcheada con los créditos públicos del FMI o los privados, básicamente de bancos rusos en base a criterios políticos, puede llevar al país durante este año 2011, a una situación insostenible.

 La falta total de transparencia en todos los niveles, la inexistencia de unas cuentas públicas, auditadas de una manera fiable, la sombra que siempre envuelve las actividades del Banco Central, la incertidumbre que pesa siempre sobre la realidad de la grivna ( UAH )....sobre la realidad de la masa monetaria...todos estos factores, hacen muy difícil que una empresa o empresarios tengan una actitud positiva en referencia a todo lo que supongo invertir en Ucrania en el terreno productivo. Solamente, florecen las empresas o empresarios dedicados a la economía especulativa, con grandes capitales, que aprovechan la debilidad del país y incertidumbre que sobre el pesa, para especular en cualquier de los terrenos ( cambio divisas, agrícola, inmobiliario etc...).

 Como ejemplo de lo que decimos, para que entiendan que no exageramos, un informe del Banco Mundial, en relación a la facilidad para gestionar la fiscalidad de la empresa, situaba a Ucrania en el lugar 181 detrás de países como el Chad, la Rep. del Congo etc...

 El nuevo Cogido Fiscal de Ucrania, la gran actuación del Gobierno nacional para demostrar a las instituciones internacionales que hay una intención de cambiar las cosas, a C/P lo único que ha producido es una reacción en contra en todas las PYME ante la absurdidad de multiplicar la fiscalidad en un situación de profunda depresión económica como en la que se encuentra el país. Mientras tanto, las grandes empresas, siguen evadiendo impuestos a paraísos fiscales, las fronteras y sus aduanas son el reino del contrabando etc...

 Los empresarios tanto locales como extranjeros están absolutamente descolocados en esta situación, y la situación de incertidumbre es tal que es prácticamente imposible encontrar empresas con nuevos proyectos para el 2011 en Ucrania. Si a esto le añadimos la presión por parte de los organismos vinculados a los órganos de control del Estado en material fiscal y legal, llegando en muchos casos al chantaje, es evidente que Ucrania puede sufrir un nuevo proceso de fuga de capital y emigración de su población mas capacitada, como ya paso en los primeros años de la década de los 90 del pasado siglo.

 En un contexto con unas finanzas públicas que se aguantan solo por la ayuda exterior, en tanto que el Gobierno no puede cumplir en sus planes de ingresos para el 2011, una ausencia total de entrada de inversión extranjera por las causas ya mencionadas, excepto empresas vinculadas al poder político ruso, las expectativas para este año son muy poco esperanzadoras.

 El riesgo de una nueva devaluación de la UAH, hasta ponerla en niveles de 1 $ = 15 UAH, evidentemente, puede llevar al país a una espiral de inflación y empobrecimiento de su población, que hace difícil de predecir cuánto tiempo el gobierno actual será capaz de mantener la paz política y social en el país.

 Ucrania, sus políticos, sus habitantes, tienen que llevar a cabo una gran reflexión como país, una 'gran catarsis' y revisar su modo de hacer de los últimos 20 años. La privatización de los activos públicos, especialmente tierras, inmobiliarios, productivos han permitido a una parte importante del país vivir durante este anos en un nivel de vida no acorde al nivel de desarrollo infraestructural, económico del país. La productividad del país es muy inferior a cualquier país de los que se pondrían como ejemplo. Ucrania no es competitiva. Los salarios son bajos pero la productividad ínfima, la fiscalidad altísima, los costos 'inesperados' altísimos...

 Si en los próximos meses, el país no experimenta un cambio radical de actitud en su manera de actuar en todos los niveles sociales, Ucrania está condenada a ser gran gigante pobre en medio de Europa. Su población condenada mayoritariamente a la pobreza y a la emigración ( esencialmente a Rusia ) y su economía condenada a ser absorbida por las grandes empresas siguiendo el modelo sudamericano.

 Este blog ha nacido con la intención de hacer creer a la gente en los nuevos países del Este, pero lamentablemente, la realidad supera nuestros deseos y no podemos escondernos. Esperemos que aquellas personas que puedan tener una responsabilidad en ese cambio que demandamos, entiendan que no existe ningún otro camino si quieren sinceramente llevar Ucrania a la senda del crecimiento y la prosperidad.

UKRAINE: POLITICAL AND ECONOMICAL FREEDOM

There's been a lot of uncertainess on UAH stabilitity during the last 2 years. When global crisis started, central bank was forced to depreciate local currency in front of USD 60% to today's actual exchange rate ( 8 UAH = 1 USD ). During last year, a lot of rumours were around regarding the collapse of the local currency. State could not manage to level income and expenses of national budget, and fears of Central bank of Ukraine using the increase of monetary mass ( M1 ) as a way for the State to be able to execute payments of pensions and debts in the inside market were very frequent.

During 2010, state buget reached a record high deficit of 11% and inflation went higher than expected reaching double figures. At some point, during last summer, new goverment was facing a very strong problem due to the shortage of revenues to be able to pay expenses.

At that point, Goverment had 3 possible solutions:

a.Issue of  10 year State Bonds.
b.Look for Private Creditors on the International Banking Arena.
c.Ask IMF for new trench of the agreed loan for Ukraine.

Each of this options depended on the attitude of the Ukraine Goverment towards political and economical questions which would satisfy possible lenders.

Financial markets did not recieve very enthusiastically the announcement of the new issue of SB. For these reason, Ukraine Goverment decided to cancell this plan as yield was rating up to 8,75% year which was not acceptable, in our opinion with the right decision, for the Ukranian Goverment.So, Goverment had 2 options left.

With a much more pragmatical approach on their relationship towards Russia, new Goverment  has been able to ease problems with Kremlin, which has opened the possibilty to collaborate more closely with russian state and private organizations. As a result of that, VTB agreed to lend at a very political 6,7% year interest rate a loan of 2 bilion $ which has been recently extended for another 6 months which has eased situation and pressure to the UAH.

From the other side, IMF approved during last August 2010 a loan of approx. 15 bilion $ at a 3% year rate which helped the Goverment to secure its financial stability for 2010.

Both loans, are based on strong promises from Ukranian authorities to undertake reform which will not be very popular and could harm its popularity. Goverment has to tackle the main problem which remains the fact that, at least, 50% of economy continues on the shadow. New legislation and more control should improve this situation. From the other side, State has been 'forced' to privatize part of its more 'strategical' assets including Ukrtelekom and some heating and electricity distribution utilities. Obviously, companies and persons favoured by this process will be related to the decision taken to provide these loans to save state financial stability during 2010. It is difficult to say, if it has been a good decision by the Goverment, but the urgency of the situation did not allow them to analize possible 3rd options.

Goverment and politicians seem to have understood that either they are able to stabilize State Budget increasing revenues and controlling increases of expenses or their independence to take decisions will be seriously jeopardize.

State Budget for 2011 forecasts an increase on revenues around 10,5% and an increase of expenses of 4,6%, in an scenario with a GDP growth of 4,5% and an expected inflation of 8,9%. It is hard to see how this results will be obtained...specially what refers to inflation as increase of prices of energy at international level will have consequences on prices at local level. Rergarding revenues, we will have to ckeck success of measures taken by Goverment in order to increase income with companies and private persons still under pressure from economical crisis and lack of financing due to previous collapse of local banking system which has seen its international sources of financing being dramatically reduced.

If these goals are reached, Goverment will be able to finish 2011 with a State deficit of 3% which would be a very satisfactory result bearing in mind situation during previous 2010.

In case these results are not obtained, Ukraine could enter a very dangerous spin down, being forced to depreciate again its currency, being unable to control its inflation and facing a situation where it would be unable to run its own political and economical strategy but the one being dictated by those ones who would be financially rescuing it.

UKRAINE: AGRICULTURE WONDERLAND ?

When referring to Ukraine, everybody talks about its huge potential to be a huge exporter of all kind of food products. It's more than 350,000 km2 of arable land, more than 57% of the total territory, considered to be the best and most fertile land in the world, should allow Ukraine to become a major player in the world when speaking about agriculture commodities such as grain, sunflower seeds, dry peas, sugar beat.



 Unfortunately, although this sector occupies more than 20% of local workforce, it does only count as approx. 6% of the GDP of the country.
 Ukraine exports grain ( 1,6 mil. Mt ), Sugar beat ( 1,4 mil. Mt ), Sunflower seeds ( 117,000 Mt ), Berries ( 115,000 Mt ) etc...but this could be 5-10 times more !!!!

 Why this situation is not changing for the last years although every goverment always speaks about the necessity to undertake changes on legislation to improve situation on this sector ?

 It is very hard to find a unique explanation for today's situation and at the same time, there is not a magical solution to improve it in the next years.

 Although there is always been a huge interest to invest in Ukraine's agriculture sector, not many companies or privates have succeed, specially if we refer to foreigners. There's a huge controversy, about the fact to give access to property of agriculture land to foreigners, which is till today forbidden. On the new draft being prepared by the Goverment, this question is being silenced, and our opinion is that, the situation will remain as till today. Some local tycoons and politicians are taking huge benefit of today's situation as they do have access to control huge extensions of land, which in many cases, they do not owe and just rent, getting a huge profit on the explotation of them. Anyway, although investment has been done in the last few years, specially in machinery to harvest, actual owners are not investing or putting as much attention as they should on increasing the performance per Ha. Low prices on labour, cost of rent of land ( 120-300 $/ Ha. ), do not motivate actual companies involved on this business to improve its performance. In many cases, these structures are supporting politicians which are blocking any changes or amendments on situation in this sector ignoring the general interest of the people of Ukraine.

 Let's have a look on a absolutely different scenario. Imagine foreigners are given the chance to buy agriculture land. This will provoke a sharp increase of prices as companies from abroad, which in some case can achive results 5 or 6 times better using techniques already applied in other countries, will be willing to pay a much higher price for purchasing the land than local investors.

 Of course, there is a very difficult balance in this question. How can be 'national interest' preserved but at the same time can we assure a improvement in agriculture sector in Ukraine ?  How can we launch a reform that could allow local farmers to keep control of its land and allow foreigners to have access and invest in agriculture in Ukraine ? In our opinion, this can only be done, first by creating a very safe enviroment for foreign investment, assuring a long-term access to land to these companies either by rent or sale of land. In these conditions, companies would be investing in technology, equipment, transfering technology to local partners and employees to launch their activities in Ukraine.
 At the same time, in order to sell their production at profitable prices, these companies should have an easy access to export channels or possibility to sale at competitive prices to local wholesale companies in a competitive economy.

 Unfortunately, today we do not have the legal system and laws which guarantee investment from foreign players in this sector. Channels to sell abroad are monopolized by few companies or individuals not willing to give away their privileges. Neither we have an open internal competitive market which would allow producers to sell at good prices to wholesalers nor supermarkets.

 All these isssues have to be readdress from new Goverment, if we want this sector to be one of the main players on the future growth of living standards of the country. In other case, we will continue watching people leaving villages as salaries and conditions of life are not improving, we will continue to see a very low qualified workforce willing to work in this sector ( with very low salaries ) and we wil continue to listen to people crying that Ukranian rural life is dying out.

 When we realize about situation which is facing our world, with an increase of population, increase of prices of food products, we do need to believe that situation will improve as world needs Ukraine to be a major producer of food products and Ukrainians need this to happen to assure a better future for themselves.

THE PROMISED LAND

  During 90's many western companies arrived to former USRR, as people flew to the West during the famous 'gold rush', expecting fast ROI and ready to take over main assets from 'poor, unexperienced-capitalist locals'.
 
  Local elites in order to cope with the new situation used the best card they had on their hands. Knowledge of local 'athmosphere' to block many foreigners to plunder and take over their countries.
 
  Of course, methods used to prevail were not the most ethic and westeners were not expecting that hard  job to try to put their legs on this new market. Acces to control on raw materials was, di facto, closed to foreigners and all was run by new groups related to the structures of power of USSR in each of the republics. Locals adopted a very unfriendly attitude towards foreig investors.
 
  Some people will consider this situation as not logical and not acceptable by international standards of relationship. In this blog, we do consider this situation as natural.
 
  Step by step, this situation starts to change when Russia, Ukraine elites go abroad, look for recognition from world business forums and realize that they are strong enough to go abroad but at the same time, they have the obligation to open its countries to foreign investors. Besides, they do not fear anymore any take over from them as they already have a reasonable financial strenght which allows them to compete with other world players.
 
  Efforts to reduce corruption, to ease burocracy are related to this new relationship being built with the rest of the world. Of course, Baltic States were the first to be friendly to foreign investment. Things are getting better in Russia and we expect some changes in Ukraine as promises during Mr.Yushenko's presidency were not implemented.
 
  Anyway, the most required change in these countries is related with law enforcement. Till today, court and judges have been too often related to bribes, fraud etc...strong local structures which control these institutions, do use them to take advantatge in front of other locals and foreigners. That creates an athmosfere of unsecurity which stops many players to get involved in investments in these countries.
 
  President Medvedev and other mandataries from these countries have promised improvements and transparency in the law system. We expect changes. 

TAXING IN UKRAINE

  During last 20 years Ukrainian Goverment has been creating and updating Tax Code in order to organize a rational system of collection of taxes in Ukraine.

  During the 90's overwhelmingly, situation could be described as full caos. In a young new state, organization and control of Tax Dpt. and inspection of fullfillment of obligations by companies and private persons was fully conditioned by a system of corruption which did not help to build up a reasonable Taxing System which could be used to cover expenses to be covered by Goverment, mainly in education, health and pensions.

  Country had a very unbalanced budget as expenses were much higher than income generated by taxes. Besides, many state companies were operating, theoretically, in losses, before being dismantled and privatize for lower price that its actual real market price.

  First decade of the new century, did bring and increase on income due to a more effective control on Taxing System. Anyway, still far from what could be desirable in a country which pretends to be part of the 1st world. Periodically, -privatization of main assest of the State ( p.e. Krivoi Rig Steal Factory ), followed by hints of corruption as selling prices, again, were lower than real market value of these assets-, helped to balance the Nartional Budget to hide the real situation of the State finances. Just postponing problems.

 Finally, last two years, due to decrease on income because of economical crisis, ukranian politicians and economists, have to approach international institutions, as IMF, asking for credits to be able to pay the most urgent payments they have to execute to pay state expenses, as salaries as pensions etc.. At that point, they do realize that international financial community is changing its attitude towards countries like Ukraine. The experience of 20 years waiting for changes which would favour investment, spread state corruption and lack of trust on local politicians means that things will be very different from now on.

 Ukraine faces a new situation. Either creates a system where all companies pay taxes and state has an income which will allow them to cover state budget expenses or faces a situation, where increase mass of local currency, will bring a very dangerous situation with a non-controled inflation and new serious devaluation of local currency ( UAH ). That's today reality. Foreign investment, will not be able to compensate in any case, actual situation. Either Tax Dpt. starts to operate properly collecting taxes from ALL companies and  private person, duties from customs are paid and not eluded ( today's estimation is that aproximately 90% of goods are smuggled into the market not paying customduties ) or the country faces a financial collapse.

 The big question is: how can Ukraine be able to have a reliable tax collection based in a stable and acceptable legislation for ukranian and foreig companies operating in the country ? How can corruption be eliminated in State organizations assuring state employees a decent salary to live ?

 This is one of the main challenges that faces the new Ukranian Goverment. In case, it does not succeed, Ukraine will enter a very dangerous scenario...depending fully on aid from foreing institutions and countries, which will jeopardize its politicial autonomy in the world arena.

 We see some attemps on these days from Ukranian goverment to tackle this problem and create a new Tax Code. Proposals made from goverment are facing strong opposition from many business sectors and private persons. Situation will be clarified during this spring. Country can not wait more to balance its national budget. Anyway, politicians have not to forget, that future growth will also depend on the friendly enviroment created for companies which are asking for a lower taxing, reduction of burocratical controls and absence of corruption.