Here is my article in the Kyiv Post. The russian version of my article will come out on Wednesday.
The Ukrainian Weekly (June 5, 2011) has three articles, including mine article, about Ukraine's trade policy. I highly recommend you reading the current issue.
June 6, 2011
May 25, 2011
ROBBING UKRAINE'S GRAIN MARKET: EXPORT QUOTAS AND EXPORT DUTIES
Ukraine, one of the top grain exporters in the world and nicknamed the bread basket of Europe, is being robbed by its government. A post-Soviet country located in Eastern Europe on an area slightly smaller than Texas has become a hostage of its mercantilist government. In October 2010 the Ukrainian Cabinet of Ministers presided by a former apparatchik, Prime Minister Mykola Azarov, enacted a resolution requiring quotas and licenses for exporting grain. The objective is to stabilize food prices and prevent a food shortage caused by last year’s poor harvest. While the protectionist policy came under harsh criticism from both foreign and domestic observers, the government extended the export grain quotas until June 30, 2011. Moreover, the government used corrupt practices of allocating export quotas and licenses wherein an unknown company Khlib Investbud received a lion’s share and gained the market power in the grain export industry. The grain industry generates 15% of Ukraine’s exports - $7.5 billion. The controversial regulation killed the spirit of competition in the domestic grain market and pushed it towards monopolization. Foreign observers express concerns that the monopolization of the export-oriented Ukrainian agriculture will contribute to higher food prices around the world. If the current trade policy is not reversed, surging grain prices will affect each of us negatively.
Quota and license are usually imposed to limit the quantity of a product and raise its price. The grain export license is given to a company by the state to buy the grains from domestic farmers at the domestic price and resell these grains at the world price to foreign buyers. Since the world price is higher than the domestic price, whoever receives the export license is guaranteed a profit of a middleman. Moreover, the export grain quota limits the quantity of export that results in a price markup. For all grains exported with the quota, the markup could total to billions of dollars. Thus, a licensed company that has an export quota receives a profit that is not earned through market competition. The government regulation creates the profit for the middleman which causes market inefficiency such market monopolization and wastes society’s resources.
Foreign observers have criticized the current trade policy on the grounds of its inefficiency. Morgan Williams, the President of the U.S.-Ukraine Business Council, estimated that losses in the domestic food industry could reach $5 billion as a consequence of the protectionist policy. According to Martin Raiser, the World Bank's Country Director for Ukraine, Belarus and Moldova, the present grain export quota system is inefficient and restricts the inflow of investment. Even with these sharp criticisms from foreign observers, the Ukrainian delegation in the World Trade Organization (WTO) defended the current export quota system by referring to Article 9 of the GATT (General Agreement on Tariffs and Trade) and Article 12 of the Agreement of Agriculture. The Ukrainian government promised WTO that “an export quota system was introduced in order to prevent a critical shortage in the domestic market resulting from a poor harvest in 2010 of certain agricultural products and eliminate a significant imbalance in the domestic grain market that is essential for food security and stability in the grain market”. Grains that fall under the regulation are crops produced by most domestic farmers: wheat, buckwheat, corn, barley, and rye.
In fact, the Ukrainian government lied to the WTO and the rest of the world to defend the protectionist policy. A “poor harvest in 2010” was a big fat lie. According to Ukraine’s State Statistics Committee, the “poor harvest of 2010” was above the average if you looked at the record of Ukraine’s grain production in the last two decades. On average, Ukraine’s agricultural sector produced 36,1 million tonnes of grain between 1990 and 2010. Ukraine’s agriculture hit the bottom in 2003 with a harvest of 20,2 million tonnes of grain while it reached the peak in 2008 with 53,2 million tonnes of grain. Thus, the “poor harvest of 2010” that was 39,2 million tonnes exceeded its average by 3 million tonnes. Nonetheless, in his controversial interview to the Kyiv Post, Ukraine’s Minister of Agriculture Mykola Prysyazhnyuk stuck to his guns and reiterated that the main reason for the regulation was the shortage of grain in Ukraine.
The current protectionist policy is an absolute failure because it hurts Ukraine’s economy. The protectionist policy that brought back the oligarchic “old family values” such as corruption protectionism, and nepotism sent a clear signal to foreign companies that Ukraine’s economy went back in the domain of the oligarchs. Foreign grain traders accused the Ukrainian government of corruption and nepotism because the distribution of quotas was not transparent. Grain traders had only seven days to apply for the export quota after the Resolution of the Cabinet of Ministers was enacted. As a result, most of the companies were unable to receive the grain availability certificate while an unknown company, Khlib Investbud, received the lion’s share.
Moreover, the export quota system that was designed to stabilize food prices failed to keep food prices from rising. Domestic food prices have increased by 20% since the quota system was introduced. Ukraine’s State Statistics Committee reports that prices of bread, sunflower and corn oil have increased by 12% since January 2011. The grain prices rose by 15% in the first quarter of 2011. The domestic consumers are outraged with surging food prices. The current economic situation is actually very drastic. In Ukraine an average pensioner receives around $100 per month. Given rising food prices, a large number of the elderly Ukrainians find themselves below the poverty threshold.
Furthermore, the protectionist policy hurts domestic farmers. The cash-strapped farmers are forced to sell their grain at lower than expected prices because the Khlib Investbud company uses its market power to dictate the prices in the domestic grain market. Remaining independent grain traders are fighting over left over crumbs. The Ukrainian government needs to understand that the current protectionist policy hurts both sides of the international trade, exports and imports. Lower profit margins do not allow the cash-strapped farmers to purchase essential machinery and fertilizer that are mostly imported from Russia, Belarus, and USA. Higher food prices forces the domestic consumers to devote a large part of their income towards food items and spend less on other imported goods.
The protectionist policy hurts everyone except the Khlib Investbud that seems to be the only winner from the whole situation. However, any criticism of the current trade policy or questioning the role of the Khlib Investbud is suppressed by the state. The editor of the English-speaking newspaper Kyiv Post, Brian Bonner, went on strike after the Ukrainian government tried to prevent the release of the hotly debated interview with Ukraine’s Minister of Agriculture. So far the Ukrainian government made only two changes to the controversial regulation. In March 2011 the government dropped corn from the original list and increased the total size of the quotas by 1.5 million tonnes to 4.2 million tonnes or 10% of the last year’s harvest.
Of course, I must mention that the Ukrainian government said today that it would replace the grain export quotas with export duties of 9 to 14 %. Replacing export quota with export duties is an old trick. The export duty has the same effect as export quota. The imposed export duties discourage exports, reduce quantity of grain exports, and raise grain prices. By the way, the Ukrainian delegation in the WTO has not yet submitted the official documents about replacement of export quotas with export duties.
It sounds logical that the government replaces quotas with duties now. Since October 2010 the Khlib Investbud backed up by the Grain Ukraine has used its market power to accumulate around 2 million tonnes of grain (5% of the last year’s grain production) at low domestic prices that the company dictated. It gives the Khlib Investbud a handicap that the company can use to compensate the imposed export duties. Other grain exporters have to play by the new rules of game. Moreover, the Khlib Investbud had exported 800,000 tonnes of grain before the government imposed export duties. If you look at the whole situation, it is clear that the Khlib Investbud is still the only winner. They have still robbed the domestic grain market!
The current trade policy signals domestic grain producers and foreign grain traders that the Yanukovych administration sticks to the protectionist policy. It also shows that the government can change policy without any legitimate economic reason at all. Ukraine's economic policy is a puppet in the hands of the Donetsk interest group. The backwardness of the current trade policy undermines Ukraine’s potential economic growth. The current protectionist policy can destroy the agricultural sector of Ukraine. If this policy continues, we will see capital leaving the agricultural sector for other industries. If this outrageous grain robbery is not stopped, the European breadbasket will be completely emptied out for the benefit of a single company. If Ukraine is still a democratic state, the government must explain why the benefit of a single company comes at the cost of the whole nation!
P.S. The edited version will appear in the Ukrainian Weekly.
Quota and license are usually imposed to limit the quantity of a product and raise its price. The grain export license is given to a company by the state to buy the grains from domestic farmers at the domestic price and resell these grains at the world price to foreign buyers. Since the world price is higher than the domestic price, whoever receives the export license is guaranteed a profit of a middleman. Moreover, the export grain quota limits the quantity of export that results in a price markup. For all grains exported with the quota, the markup could total to billions of dollars. Thus, a licensed company that has an export quota receives a profit that is not earned through market competition. The government regulation creates the profit for the middleman which causes market inefficiency such market monopolization and wastes society’s resources.
Foreign observers have criticized the current trade policy on the grounds of its inefficiency. Morgan Williams, the President of the U.S.-Ukraine Business Council, estimated that losses in the domestic food industry could reach $5 billion as a consequence of the protectionist policy. According to Martin Raiser, the World Bank's Country Director for Ukraine, Belarus and Moldova, the present grain export quota system is inefficient and restricts the inflow of investment. Even with these sharp criticisms from foreign observers, the Ukrainian delegation in the World Trade Organization (WTO) defended the current export quota system by referring to Article 9 of the GATT (General Agreement on Tariffs and Trade) and Article 12 of the Agreement of Agriculture. The Ukrainian government promised WTO that “an export quota system was introduced in order to prevent a critical shortage in the domestic market resulting from a poor harvest in 2010 of certain agricultural products and eliminate a significant imbalance in the domestic grain market that is essential for food security and stability in the grain market”. Grains that fall under the regulation are crops produced by most domestic farmers: wheat, buckwheat, corn, barley, and rye.
In fact, the Ukrainian government lied to the WTO and the rest of the world to defend the protectionist policy. A “poor harvest in 2010” was a big fat lie. According to Ukraine’s State Statistics Committee, the “poor harvest of 2010” was above the average if you looked at the record of Ukraine’s grain production in the last two decades. On average, Ukraine’s agricultural sector produced 36,1 million tonnes of grain between 1990 and 2010. Ukraine’s agriculture hit the bottom in 2003 with a harvest of 20,2 million tonnes of grain while it reached the peak in 2008 with 53,2 million tonnes of grain. Thus, the “poor harvest of 2010” that was 39,2 million tonnes exceeded its average by 3 million tonnes. Nonetheless, in his controversial interview to the Kyiv Post, Ukraine’s Minister of Agriculture Mykola Prysyazhnyuk stuck to his guns and reiterated that the main reason for the regulation was the shortage of grain in Ukraine.
The current protectionist policy is an absolute failure because it hurts Ukraine’s economy. The protectionist policy that brought back the oligarchic “old family values” such as corruption protectionism, and nepotism sent a clear signal to foreign companies that Ukraine’s economy went back in the domain of the oligarchs. Foreign grain traders accused the Ukrainian government of corruption and nepotism because the distribution of quotas was not transparent. Grain traders had only seven days to apply for the export quota after the Resolution of the Cabinet of Ministers was enacted. As a result, most of the companies were unable to receive the grain availability certificate while an unknown company, Khlib Investbud, received the lion’s share.
Moreover, the export quota system that was designed to stabilize food prices failed to keep food prices from rising. Domestic food prices have increased by 20% since the quota system was introduced. Ukraine’s State Statistics Committee reports that prices of bread, sunflower and corn oil have increased by 12% since January 2011. The grain prices rose by 15% in the first quarter of 2011. The domestic consumers are outraged with surging food prices. The current economic situation is actually very drastic. In Ukraine an average pensioner receives around $100 per month. Given rising food prices, a large number of the elderly Ukrainians find themselves below the poverty threshold.
Furthermore, the protectionist policy hurts domestic farmers. The cash-strapped farmers are forced to sell their grain at lower than expected prices because the Khlib Investbud company uses its market power to dictate the prices in the domestic grain market. Remaining independent grain traders are fighting over left over crumbs. The Ukrainian government needs to understand that the current protectionist policy hurts both sides of the international trade, exports and imports. Lower profit margins do not allow the cash-strapped farmers to purchase essential machinery and fertilizer that are mostly imported from Russia, Belarus, and USA. Higher food prices forces the domestic consumers to devote a large part of their income towards food items and spend less on other imported goods.
The protectionist policy hurts everyone except the Khlib Investbud that seems to be the only winner from the whole situation. However, any criticism of the current trade policy or questioning the role of the Khlib Investbud is suppressed by the state. The editor of the English-speaking newspaper Kyiv Post, Brian Bonner, went on strike after the Ukrainian government tried to prevent the release of the hotly debated interview with Ukraine’s Minister of Agriculture. So far the Ukrainian government made only two changes to the controversial regulation. In March 2011 the government dropped corn from the original list and increased the total size of the quotas by 1.5 million tonnes to 4.2 million tonnes or 10% of the last year’s harvest.
Of course, I must mention that the Ukrainian government said today that it would replace the grain export quotas with export duties of 9 to 14 %. Replacing export quota with export duties is an old trick. The export duty has the same effect as export quota. The imposed export duties discourage exports, reduce quantity of grain exports, and raise grain prices. By the way, the Ukrainian delegation in the WTO has not yet submitted the official documents about replacement of export quotas with export duties.
It sounds logical that the government replaces quotas with duties now. Since October 2010 the Khlib Investbud backed up by the Grain Ukraine has used its market power to accumulate around 2 million tonnes of grain (5% of the last year’s grain production) at low domestic prices that the company dictated. It gives the Khlib Investbud a handicap that the company can use to compensate the imposed export duties. Other grain exporters have to play by the new rules of game. Moreover, the Khlib Investbud had exported 800,000 tonnes of grain before the government imposed export duties. If you look at the whole situation, it is clear that the Khlib Investbud is still the only winner. They have still robbed the domestic grain market!
The current trade policy signals domestic grain producers and foreign grain traders that the Yanukovych administration sticks to the protectionist policy. It also shows that the government can change policy without any legitimate economic reason at all. Ukraine's economic policy is a puppet in the hands of the Donetsk interest group. The backwardness of the current trade policy undermines Ukraine’s potential economic growth. The current protectionist policy can destroy the agricultural sector of Ukraine. If this policy continues, we will see capital leaving the agricultural sector for other industries. If this outrageous grain robbery is not stopped, the European breadbasket will be completely emptied out for the benefit of a single company. If Ukraine is still a democratic state, the government must explain why the benefit of a single company comes at the cost of the whole nation!
P.S. The edited version will appear in the Ukrainian Weekly.
April 12, 2011
March 24, 2011
Ukraine's Land Reform in Cartoons
Here is my Op-Ed/cartoon in the Kyiv Post: http://www.kyivpost.com/news/opinion/op_ed/detail/102164/
March 9, 2011
The Aid Workers Really Help Ukraine
The Economist had a very interesting piece about an impact of international remittances (e.g. MoneyGram, Western Union) on economic development. The main point of the article was that migrant workers send more money back home than their countries receive in foreing aid. Ukraine seems to be the case too. If you look at the following graph, you can see that the remittances (measured in current US dollars) reached almost $6 billion in 2008. FYI, the total amount of foreign aid that Ukraine received between 1991 and 1999 was only $4 billion (current US dollars). After adjusting for inflation, Ukraine received $5,2 billion in foreign aid between 1991 and 1999 (I used BLS's CPI data). An annual amount of international remittances still exceed an amount of foreing aid that Ukraine received in almost ten years!
February 21, 2011
Russia and USA House More Inmates than All European Countries Combined
The Pew project has very interesting data on incarceration per capita. USA houses more inmates than the top 35 European countries combined. Russia is in the second place. Another interesting fact is that the top ten, except USA, represents the former Soviet countries. Also, I am surprized that dwarf-countries like Georgina, Estonia, Latvia, and Lithuania are in the top ten. What are the causes? It could be that the FSU countries and USA have higher crime rate than European countries. It could be that the law and enforcement is more effective in the former Soviet countries and USA. I doubt it.
Here is a link: http://rortybomb.wordpress.com/2010/09/29/pew-economic-mobility-project-incarcerations-effects-on-economic-mobility/
Here is a link: http://rortybomb.wordpress.com/2010/09/29/pew-economic-mobility-project-incarcerations-effects-on-economic-mobility/
February 14, 2011
Ukraine's Macroeconomic Situation
Here is a snapshot of data taken from the EBRD's Macroeconomic Indicators. The 2007-2009 recession had a devastating effect on Ukraine's economy. GDP dropped by 15.1%, unemployment reached 8.1%, consumer prices increased by 15.9 % and producer prices increased by 6.5%. Ukraine's external debt grew from 56.4% to 91.7% of its GDP. Ukraine's internal government debt increased from 19% to 31.3% of its GDP.
I am always amazed how politics distorts a macroeconomic reality. If I cranked up my credit cards to 150% of my annual income, who would give me a loan? I cannot think of anyone except the Lehman Brothers. Oops, they are out of the business.
Why should it be different with countries? The Ukrainian government is negotiating another loan with the IMF. By the way, the government has already received a $15.1 billion loan in August 2010. The IMF's website says that "the IMF’s Executive Board has approved a $15.1 billion loan for Ukraine to put the country on the path to fiscal sustainability, reform the gas sector, and shore up the country’s banking system." What fiscal sustainability do we talk about here? Did someone look at the currently outstanding size of both internal and external debts of Ukraine? It is not fiscally sustainable now.
Where do all IMF loans go? Ukraine looks like a black hole that sucks in multi-billion-dollar loans from international charitable organizations like IMF or EBRD. Ukraine and similar countries cannot have the fiscal sustainability until they develop a government accountability. Until then each charitable organization must correct their language by calling their "loan for Ukraine" as "loan for the government".
Why should it be different with countries? The Ukrainian government is negotiating another loan with the IMF. By the way, the government has already received a $15.1 billion loan in August 2010. The IMF's website says that "the IMF’s Executive Board has approved a $15.1 billion loan for Ukraine to put the country on the path to fiscal sustainability, reform the gas sector, and shore up the country’s banking system." What fiscal sustainability do we talk about here? Did someone look at the currently outstanding size of both internal and external debts of Ukraine? It is not fiscally sustainable now.
Where do all IMF loans go? Ukraine looks like a black hole that sucks in multi-billion-dollar loans from international charitable organizations like IMF or EBRD. Ukraine and similar countries cannot have the fiscal sustainability until they develop a government accountability. Until then each charitable organization must correct their language by calling their "loan for Ukraine" as "loan for the government".
February 9, 2011
Assorted Links
1. The top 20 articles published in the AER (American Economic Review) over the last 100 years.
2. There is no free lunch in our life unless you are looking for a wife from Ukraine.
3. A number of Ukrainians participating in the Green Card Lottery (Electronic Diversity Visa Lottery) reached a new record. 760,000 applications in 2010!
2. There is no free lunch in our life unless you are looking for a wife from Ukraine.
3. A number of Ukrainians participating in the Green Card Lottery (Electronic Diversity Visa Lottery) reached a new record. 760,000 applications in 2010!
Learn Ukrainian in Ukraine with University of Alberta
If you want to study Ukrainian in Lviv, Ukraine (birthplace of Ludwig Von Mises, distinguished Austrian economist), you should check out the program that University of Alberta (Canada) is running this summer.
Here is a link: http://www.arts.ualberta.ca/~ukraina/study_in_ukraine/ukrainian_through_its_liv/
Here is a link: http://www.arts.ualberta.ca/~ukraina/study_in_ukraine/ukrainian_through_its_liv/
January 26, 2011
"The Beverly Hills" of Ukraine: Kharkiv's Rublevka and Public Land Grab.
I guess that I shall start a new series of stories about a land grab in Ukraine. I am not taking about privatization or eminent domain. I am taking about different schemes that the government officials use to transfer public land into their private ownership. The land grab takes place all over the former Soviet Union area because a rule of law is weak and a system of property rights is insecure.
I think that it is fair enough to call it a land grab because public land is grabbed rather than purchased or inherited. Since the government officials are the riches of Ukraine or vice versa, they can afford to develop the grabbed public lands into the upscale gated communities like the Beverly Hills in California, USA. Since the first upscale gated community so-called Rublevka was built in Moscow on Rublevsky highway, all similar real estate developments are named after it.
Today I would like to talk about Kharkiv's Rublevka. Kharkiv is the second largest city in Ukraine. The two most important people in Kharkiv are the Mayor of Kharkiv, Mr. Kernes, and the Governor of Kharkiv region, Mr. Dobkin. Both government official are members of the presidential Party of Regions aka the regionals. I wrote about a series of conflicts between the City Hall and Kharkivians earlier. But I can see everything in a new light now when the Bureau of Land Management of Kharkiv Region releases a very interesting data. According the BLM, the city of Kharkiv auctioned public land only once in 2008. Back then the City Hall sold 3 hectares or 7.41 acres of land for 28 mln. hryvnia or $3,5 mln. The BLM, however, reports that more than 100 hectares or 247 acres of public land located in the Central Park of Kharkiv (The Gorky Park) are privately-owned and under the real estate development. Well, it is quite a mismatch. So here is a math question:
Q. Suppose that A sells 7.41 acres of public land to B for $3,5 mln in 2008. How much can A get if A sells 247 acres of public land to B and price of land does not change?
A. $116,6 mln. (FYI, it is the budget of Kharkiv in 2010).
Who says that you cannot put a price tag on corruption? Simple math. Simple land grab. People lose favourite recreational spot and the city budget looses millions of dollars while while the government officials enrich themselves. What can I say? I look forward to more math problems from the City Hall of Kharkiv. These guys are math whiz kids.
Here are the pictures that show the real estate development in Kharkiv's Central Park. The first picture shows the so-called "Kharkiv's Rublevka" gated community in the Gorky Park. The second picture shows a new real estate development adjacent to the Kharkiv's Rublevka. The Kharkivians have already gave a nickname to the new gated community. They call it "New Rublevka". Also, the Kharkivians start referring to their city as the Kernes City.
Here is the YouTube video about a real estate development of the grabbed lands in Kharkiv. It is in Russian. But you should check it out. It shows the maps of the Kharkiv's Rublevka in the Gorky Park.
I think that it is fair enough to call it a land grab because public land is grabbed rather than purchased or inherited. Since the government officials are the riches of Ukraine or vice versa, they can afford to develop the grabbed public lands into the upscale gated communities like the Beverly Hills in California, USA. Since the first upscale gated community so-called Rublevka was built in Moscow on Rublevsky highway, all similar real estate developments are named after it.
Today I would like to talk about Kharkiv's Rublevka. Kharkiv is the second largest city in Ukraine. The two most important people in Kharkiv are the Mayor of Kharkiv, Mr. Kernes, and the Governor of Kharkiv region, Mr. Dobkin. Both government official are members of the presidential Party of Regions aka the regionals. I wrote about a series of conflicts between the City Hall and Kharkivians earlier. But I can see everything in a new light now when the Bureau of Land Management of Kharkiv Region releases a very interesting data. According the BLM, the city of Kharkiv auctioned public land only once in 2008. Back then the City Hall sold 3 hectares or 7.41 acres of land for 28 mln. hryvnia or $3,5 mln. The BLM, however, reports that more than 100 hectares or 247 acres of public land located in the Central Park of Kharkiv (The Gorky Park) are privately-owned and under the real estate development. Well, it is quite a mismatch. So here is a math question:
Q. Suppose that A sells 7.41 acres of public land to B for $3,5 mln in 2008. How much can A get if A sells 247 acres of public land to B and price of land does not change?
A. $116,6 mln. (FYI, it is the budget of Kharkiv in 2010).
Who says that you cannot put a price tag on corruption? Simple math. Simple land grab. People lose favourite recreational spot and the city budget looses millions of dollars while while the government officials enrich themselves. What can I say? I look forward to more math problems from the City Hall of Kharkiv. These guys are math whiz kids.
Here are the pictures that show the real estate development in Kharkiv's Central Park. The first picture shows the so-called "Kharkiv's Rublevka" gated community in the Gorky Park. The second picture shows a new real estate development adjacent to the Kharkiv's Rublevka. The Kharkivians have already gave a nickname to the new gated community. They call it "New Rublevka". Also, the Kharkivians start referring to their city as the Kernes City.
Here is the YouTube video about a real estate development of the grabbed lands in Kharkiv. It is in Russian. But you should check it out. It shows the maps of the Kharkiv's Rublevka in the Gorky Park.
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