Cyclopedia Of Economics

U-V-W

Ukraine, Economy of

Reading the Western media, one would think that Ukraine's main products are grotesquely corrupt politicians, grey hued, drab, and polluted cities, and mysteriously deceased investigative journalists and erstwhile state functionaries.

When another journalist was found dead in Odessa on New Year's Eve 2002, both the Prosecutor General and the Ukrainian Parliamentary Committee for Fighting Organized Crime and Corruption have accused the entire Ukrainian Cabinet of Ministers of collusion in shady dealings with Kazakhoil, the Kazakh national oil monopoly.

The "Orange Revolution" in October-November 2004 the disorderly, though popular, transfer of power from one group within the "Dniepropetrovsk family", headed by Leonid Kuchma and his henchman to another faction, headed by the volatile and incompatible Viktor Yushchenko and Yulia Timoshenko led to more deaths in unexplained circumstances.

Both Yushchenko and Timoshenko had served in senior positions (as prime minister, for instance) in the ancien regime and, therefore, may have skeletons in their cupboards. The spate of "suicides" committed by former and knowledgeable functionaries came as no surprise - both parties, outgoing and incoming, have a vested interest in suppressing embarrassing revelations.

From December 2001 onwards, the Legsi (the Lehman Brothers Eurasia Group Stability Index) kept warning against a deterioration in Ukraine's social stability, owing to fiercely resisted austerity measures.

Until recently, things were not auspicious on the international front as well. During the Balkan hostilities between Macedonians and Albanians in 2001, Ukraine supplied Macedonia with attack helicopters and other weaponry over the strident objections of the State Department. Its strategy of ever closer union with Russia and China was in ruins following the sudden shift in Putin's geopolitical predilections after the September 11 attacks. And to spite the EU (which forced Poland to impose strict controls on its porous border with Ukraine) - "starting from 1 January 2002, Kyrgyz citizens, like the citizens of Azerbaijan, Armenia, Kazakhstan, Tajikistan and Uzbekistan, may enter, leave and pass through Ukraine without visas" as the Kyiv based UNIAN news agency jubilantly announced on January 4th, 2002.

Its parliament having failed to pass a government sponsored law against the unlicensed production of CD ROM's (piracy) - the Ukraine was subjected on January 2, 2002 to much postponed US imposed stiff trade sanctions (estimated to cost it $500 million per year). The employees of Ukraine's largest CD maker, Rostock Records, demonstrated opposite the US embassy against the sanctions, denouncing them as "economic terrorism". The International Federation of Phonographic Industry (IFPI) countered by saying that "Ukraine is the largest exporter of pirated CDs to Europe, with tens of millions of high quality illegal copies shipped each year to markets throughout Europe and as far away as South America."

At any rate, following its blatant intervention in the political machinations which led to the Orange Revolution in October-November 2004, anti-American sentiments are running higher than usual in the eastern, Russophile parts of the country.

Ukrainian discontent is further exacerbated by the American continued threat to slap tariffs on steel imports despite a last minute agreement signed in 2001 with the EU and other major steel manufacturing countries to curb worldwide production. Ukraine has agreed to cut its output by 11 million tons annually (out of a total reduction of 97.5 million tons). Depressed prices for gallium (used mainly in the recession-struck mobile phones industry) have gravely affected Ukraine's only alumina producer (Mykolaevsky Hlynozyomny Zavod) which has just quintupled its capacity to 10 tons.

Ukraine is optimally located between Central Europe and Russia. It is the largest polity in East Europe and the second largest country is Europe (almost the size of Texas). It is rich in natural endowments, though hopelessly polluted (Chernobyl is in the Ukraine) and deforested. In the former USSR, it provided 25% of all agricultural produce. The Soviet mining and oil industries relied on Ukrainian heavy industry for their equipment. The literacy rate in Ukraine is 100% and many are polyglot.

Yet, these Ukrainian riches were squandered in the decade following independence. Dependence on energy and a reform effort thwarted by entrenched Communist era stalwarts led to a 60% drop in GDP compared to 1991 (the year of its independence). Frenetic money printing resulted in hyperinflation in 1993. Inflation has still not been subdued and has topped 26% as late as 2000.

More than 50% of the population are under the official, starvation level, poverty line. Though only 5.3% are registered as unemployed, both underemployment and hidden unemployment are rampant. Mercurial and default prone Russia is still Ukraine's main trade partner (c. 30% of its international trade). Each of Ukraine's 49 million citizens owes $200 to foreign creditors - the equivalent of 30% of GDP per capita. Public debt has doubled to c. 50% of GDP in the four years to 2000. Worse still, Ukraine is increasingly used as a drug smuggling route and drugs growing area for the CIS. Synthetic drugs are manufactured in the Ukraine and smuggled to the countries of Western Europe.

Ukraine is a major target for Russian investors, especially from the energy sector. Putin appointed Victor Chernomyrdin, a political heavyweight - a former Prime Minister and, more importantly, a former chairman of Gazprom, the Russian energy behemoth - as Russia's ambassador in Kyiv. Ukrainians are not against Russian investment - but they are averse to the political strings it comes attached to. They also resent the bargain basement prices at which their most valued assets are "privatized" to these old-new "foreign" investors. Inevitably, they ask themselves "cui bono" - who benefits personally from these questionable transactions. The answer is not too hard to guess - but guessing has proven to be a dangerous occupation. At least one muck-raking journalist has been (literally) beheaded and a senior politician (now prime minister in the new regime) jailed for trying to reform the energy sector.

Inevitably, Ukraine is socially and politically strained. Its western parts are fiercely nationalistic and West oriented. Its eastern parts lean more towards Russia and are USSR-nostalgic. But this apparent schism is no bad thing. It provides Ukrainians with a secure foothold in both worlds - and no one seriously considers secession.

Unnoticed by many, Ukraine is undergoing a seismic shift which may result in an economic revival of Chinese proportions.

When Viktor Yushchenko, the popular Prime Minister and darling of the West was brutally ousted in May 2001 by the authoritarian President, Kuchma (himself hailed as a daring reformer by the IMF when elected in 1994), everyone predicted a calamity. Yet, Yushchenko moved since then to the centre in what appears to be an implicit reconciliation with the president.

His replacement, Anatoly Kinakh, surprised everyone by proving to be an efficient and modernizing technocrat. Ukrainian bonds returned to investors more than 60% net in 2001-2, making them the best emerging markets investment by far. Its capital markets are gradually being internationalized. The much maligned Kuchma introduced a sweeping anti-money laundering decree (later to become law). Ukraine (since its 1998-2000 series of de facto defaults following the financial meltdown in Russia) is now a model debtor. In August 2000 it has even re-paid the IMF $100 million.

Possibly emboldened by his re-election in 1999, Kuchma seemed to be making real efforts to streamline the government (which anyhow consumes a mere 18% of GDP), cut red tape, consolidate the government's fiscal stance (Ukraine had small budget deficits, excluding privatization receipts, in 1999-2001), become a WTO member, and create a legal environment conducive to private enterprise and entrepreneurship.

A new Land Code - passed by a surprising ad hoc parliamentary alliance and providing for the (limited) private ownership of land - took effect on January 2, 2002. Payment discipline in the critical energy sector was enforced, the agriculture sector was revamped, non cash revenue offsets and cronyist tax exemptions were entirely eliminated, government arrears (including pensions) were substantially reduced (though new arrears have again accumulated thereafter), a privatization law was finally introduced, and municipal finance was rationalized.

The government's contractionary fiscal rectitude (a new Budget Code was enacted and tax collection improved) was balanced by the central bank's (NBU) expansionary monetary policy aimed at increasing its dangerously dilapidated foreign exchange reserves (c. $2.4 billion in 2001) and spurring growth in the real sector. Rising demand for money and the propitious existence of a thriving informal (cash) economy prevented the resurgence of inflationary pressures - though inflation has picked up in December 2001, forcing the central bank to tighten in 2002 (it disputes the government's official figure of 6.1% inflation for 2001).

In 2000 the economy grew for the first time (by 6%). Growth was export driven and industrial output increased by 13%. The global recession has hurt Ukraine's export prospects but even so, it grew by 4-5% in 2001. It continued to expand by 2-4% each year in 2002-2004.

With a labour cost of 30 cents per hour, Ukraine attracts the interest of manufacturers in the US, in Central Europe, and even in Russia. Strong import growth may swing it back to a current account deficit (in a surplus of c. 5% of GDP in 2001, as it has been in the previous 2 years). Fiscal shenanigans ahead of the March 2002 and October 2004 elections (and the horse trading which inevitably followed) had ratcheted up the predicted inflation rate of 9-12% - but the appreciation of the hryvna is set to continue.

The economy is surprisingly modern. Only 24% are employed in agriculture (and they produce a mere 12% of GDP). More than double that is produced by industry (26% of GDP) and a whopping 62% of GDP is generated in services (in which only 44% of the labour force are employed).

On December 2001, S&P upgraded Ukraine's currency risk rating (both foreign and domestic) to "B" with a "Stable" long term outlook. On the pro side, S&P cited financial stability, partly the result of a rationalized and rescheduled foreign debt structure. On the con side, it cited the usual litany of corruption, weak legislature, problems with privatization and with structural reform and malignant oligarchs. These flaws being noted, it did upgrade Ukraine's rating - as did Fitch, Moody's and Japan's Rating and Investment Information Agency. The price of Ukraine's (mainly dollar denominated) Eurobonds appreciated dramatically on institutional buying immediately following the announcement.

Ukraine's image as bereft of Foreign Direct Investment is false. Moreover, c. 80% of all FDI in Ukraine is Western - not Russian. USA investors compete with Russian (cum "Cypriot") investors - each holding 17% of the total stock of FDI (c. $4.5 billion in early 2002).

Moreover, Ukraine is now in good standing with the IMF (after a difficult 2001 in which the IMF virtually suspended all communication with Ukraine due to falsified data provided by the NBU). It has signed in 1998 a $2.6 billion arrangement (of which $1.6 billion are used). Another tranche of c. $380 million was approved in September 2001. The IMF singled out the banking, energy, and agriculture sectors as in need of continued, pervasive, reforms.

The World Bank has committed close to $3 billion (and disbursed $2.2 billion) to projects in Ukraine (mostly in the energy, mining, agriculture, finance, and private sectors) since 1992. The latest Country Assistance Strategy documents for Ukraine (2001-2003 and 2004-6) are unusual in that they seek to circumvent the hopelessly venal and discredited administration and work directly with the public, business, and NGO's towards building a civil society and its attendant institutions. "The strategy seeks to move Ukraine closer to the European Union standards, fostering environmentally-sustainable development" - says the Bank. though it hastens to emphasize the success the government had in implementing its reforms.

As of June 2001, the EBRD (which has a mixed track record in Ukraine) has approved 45 projects in Ukraine (34 of which in the private sector) worth 1.2 billion euro. This excludes the construction of a highly controversial and politically inspired nuclear power plant.

Ukraine has gone so low in the world that its fortunes can only improve. It is poised for a modest economic comeback as its mediating geographic position between centre and east comes into play with EU enlargement. Kuchma was eased out by the very oligarchs he nurtured. They now constitute an element in a broad based coalition for reform. Having sated their appetite for loot they now seek respectability and access to capital markets and credits in the West. They want a functioning country and a larger cake. Kuchma is a figurehead of a disfigured past. In the long run, a Putin style robotic reformer is likely to succeed him. When it happens, Ukraine may yet become the region's first economic tiger.

The "Orange Revolution" in October-November 2004 was a coup d'etat. It was a disorderly, though popular, transfer of power from one group within the "Dniepropetrovsk clan", headed by Leonid Kuchma and his henchman to another faction, headed by the volatile and incompatible Viktor Yushchenko and Yulia Timoshenko.

Both figures had served in senior positions (as prime minister, for instance) in the ancien regime and, therefore, may have skeletons in their cupboards. A spate of "suicides" committed by former and knowledgeable functionaries came as no surprise - both parties, outgoing and incoming, have a vested interest in suppressing embarrassing revelations.

Still, Ukraine's long-predicted economic revival is at hand. After a long hiatus, both the International Monetary Fund and the World Bank are expected to make new commitments in their forthcoming visits this year. As correctly observed by the former Finance Minister Mykola Azarov, Ukraine needs at least $600 to 800 million in fresh funds. Debt repayments amounted to $1.6 billion in both 2003 and 2004. Ukraine is even considering a bond issue.

Concurrently, as it did in 2003, NATO is likely to stage in Ukraine a massive one week long military exercise under the aegis of the "Partnership for Peace" - its collaborative program with the countries of East and Southeast Europe. It will involve army units from Armenia, Austria, Azerbaijan, Bulgaria, Germany, Georgia, Italy, Canada, Kyrgyzstan, Lithuania, Moldova, Norway, Poland, Romania, France, Ukraine, Uzbekistan and the United States.

But Ukraine was embraced by the international community long before the Orange Revolution. It is instructive to follow the rising temperatures that led to the thaw. It seems that in Ukraine's case carrots did the trick - not sticks, a lesson worth remembering in the forthcoming confrontation with Iran.

This, therefore, is an overview of the two years leading to Ukraine's 2004 presidential elections.

The USA already cancelled in 2003 financial sanctions it had earlier imposed on Ukraine on the recommendation of the Financial Action Task Force. Ukraine is no longer a center of money laundering, said the international watchdog. It was be removed from the agency's blacklist last year and joined the EGMONT group of the financial intelligence units of 69 countries.

There were other signs of thawing. A 16-month ban on $11 million in U.S. poultry imports was terminated in April 2003 with the signing of a revised veterinary certificate protocol. Simultaneously, Ukrainian officials held talks with their European Union counterparts to integrate the two space programs. Ukraine has expertise in launch vehicles, satellites and payloads. And Volkswagen inked a letter of intent in 2003 regarding the assembly of its Passat, Golf, Bora and Polo models in Ukraine.

According to Radio Free Europe/Radio Liberty, in March 2003, the EU offered Russia, Ukraine, and Moldova - its future neighbors following enlargement - "preferential trade terms, expanded transport, energy, and telecommunication links, and the possibility of visa-free travel to the EU." The door to future accession was left ajar, though the inclusion of North African nations in the "New Neighborhood Policy" bodes ill for Ukraine's future membership.

Long-stalled negotiations between Ukraine and the European Bank for Reconstruction and Development over the $215 million financing of two much-disputed nuclear power plants to replace the smoldering Chernobyl reactor were mysteriously restarted in April 2003 and successfully concluded the year after, to the chagrin of many environmentalists. The Bank's President, Jean Lemierre, promised at the time positive results by summer - despite environmental concerns and studies, financed by the EBRD itself, which cast in doubt the project's feasibility.

Quoted by Interfax-Ukraine, then Foreign Ministry spokesman Markijan Lubkivskyy, announced in early April 2003, that "the U.S. may subcontract Ukrainian companies (for postwar reconstruction in Iraq), particularly those that have experience in working with firms in the Persian Gulf."

There were good news from the East as well.

Turkmenistan and Russia started negotiating with Ukraine - a major gas importer - a tripartite 25 year agreement to exploit and export Turkmen natural gas with prices frozen throughout at current levels, well below the market. In return, Ukraine is supposed to co-finance the construction of a $1 billion, 1070 kilometer long, 30 to 40 billion cubic meters a year, pipeline, mostly on Kazakh territory, along the shores of the energy-rich Caspian Sea.

Inevitably, not all was rosy.

In contravention of all prior measures of liberalization, President Leonid Kuchma administratively halved grain exports to 1 million tons a month, due to a weak harvest in the first quarter of 2003 and rising domestic grain prices. The Crimean agricultural ministry announced at the time that one is seven hectares of winter crops - mostly barley - are lost due to the harsh weather.

This is half the average ratio in other parts of Ukraine. According to AgWeb.com, "the country's milling wheat crop (in 2003) may be only 10 million metric tons to 12 MMT, down sharply from 22 MMT in 2002 and 26 MMT in 2001". Domestic consumption, at 7 million tons, now equals inventories.

The country - formerly Europe's breadbasket - still lacks modern infrastructure and grain storage facilities. Its extempore export policy is muddled. Agricultural imports are surging. Ukraine bought 70,000 tons of - mainly Brazilian - sugar in February 2003 alone.

In the worst of Stalinist traditions, the former Deputy Prime Minister for Agriculture Leonid Kozachenko, a reformer, was promptly arrested by Kuchma's security apparatus for "bribery and tax evasion". Grain merchants, foreign investors and multinationals included, were placed under official scrutiny.

In an unusually strongly worded letter to Ukraine's then Ambassador to the United States Kostyantyn Hryshchenko, President of Ukraine-US Business Council, Kempton B. Jenkins wrote:

"We hope that this effort to turn back the clock to Soviet-style management of Ukraine's critical sector will soon disappear and allow Ukraine's dramatic march to productivity and prosperity to resume."

Nor has Ukraine forsaken its erstwhile clients, frowned upon by an increasingly assertive United States. According to IRNA, the Iranian news agency, a Ukrainian delegation visited Iran in April 2003 to discuss the construction of Antonov An-140 aircraft. Later that week, Pakistan and Ukraine negotiated a free trade agreement.

Standard and Poor's, the international rating agency, concluded, in a report it released the same month, that "despite some early successes, the political environment in Ukraine remains difficult and financing uncertainties continue".

The Sovietologist John Armstrong dubbed the Ukrainians the Russians' "smaller brothers". This is no longer true. Unlike Russia, Ukraine aspires to NATO membership but is far less pro-American. It seeks Russian investments but is wary of the imperial intentions of its neighbor. Despite Russian coaxing, Ukraine hasn't even joined the Eurasian Economic Community, a pet project of the Russia-dominated Commonwealth of Independent States.

In the meantime, Ukraine is bleeding both its least-skilled, menial workers - and its most highly educated brains. Ukrainians are welcome nowhere and abused everywhere. Israel deported 300 illegal Ukrainian aliens in 2003 alone. Others - notably Turkey, Hungary, Poland, Slovakia, and Italy - followed suit.

Ukraine's then ombudswoman Nina Karpachova pegs the number of economic exiles at between 2 and 7 million. At least 5 million - one fifth of the workforce - seek seasonal employment abroad. Remittances amount to between $2 and $3 billion a year.

One quarter of all Ukrainians barely survive under the wretched poverty line. Official unemployment - at 11 percent - underestimates the problem by half. A low birth rate conspires with elevated mortality to produce a self-induced demographic genocide.

Capital flight is on the rise and equals half the foreign direct investment in the economy. Then Governor of the National Bank, Sergiy Tyhypko, estimated in February 2003 that as much as $ 2.27 billion fled Ukraine in 2002 - compared to $898 million in 2001 and $385 million in 2000. This is the reflection of a thriving informal economy, half the size of its formal counterpart, by some measures.

Appearances aside, ubiquitous corruption, tottering banks, clannish institutions, compromised leadership, illicit deals and barely contained xenophobia are entrenched in Ukraine's criminalized economy. As the 2004 presidential elections neared, the oligarchs augmented their war chests abroad. Kuchma failed to postpone the elections to 2006 or 2007. The opposition aggressively opposed such chicanery. Despite the Orange Revolution, or maybe because of it, Ukraine may be in for a bumpy ride ahead.

Unemployment and Labor

There is a connection between economic growth and unemployment. There is a connection between growth and inflation. Therefore, commonsense (and financial theory) goes, there must be a connection between inflation and unemployment. A special measure of this connection is the Non Accelerating Inflation Rate of Unemployment (NAIRU). Supposedly, this is the rate of unemployment which still does not influence inflation. If unemployment goes below NAIRU, inflationary pressures begin to exert themselves.

This is closely linked to the other concepts, those of "structural", "frictional" and "conjectural or cyclical" unemployment types.

Some unemployment, the theory, goes is frictional. It is the inevitable result of a few processes:

1. 
   Labour Mobility – People move from one job to another, either because they are fired or because they seek to improve their lot. In the intervening period between leaving an old workplace and finding another, they are unemployed.
   

1. 
   Labour Force Expansion – Every year there are new entrants to the labour market. Generations mature and are ripe to be part of the labour force. Until they find their first job – these new participants are unemployed.
   

1. 
   Seasonal and Part Time Employment – Some professions are seasonal by their nature (a hotel in a resort hotel, for instance). These workers join the ranks of the unemployed at certain times and desert them seasonally. Other workers prefer to work part time or in the "Grey" or "Black" economy. They go unreported or report themselves as unemployed, thus distorting the true picture of unemployment.
   

The frictional type of unemployment is a sign of economic health. It indicates a dynamic economy in fast development. It is a sign of labour mobility, of labour flexibility (part time solutions and flexitime) and of labour adaptability. This cannot be said about the second, more insidious, type, the structural unemployment. It is this kind of unemployment which really bothers governments and worries social planners. It has long term psychological and social effects and limits both economic growth and social cohesion. It is also the most difficult to battle.

Usually, it is the result of ingrained, long term and structural processes and changes in the economy and cannot be fought with artificial one-time measure (employment initiated by the state or fiscal stimulus intended to encourage employment). Among the factors which create it:

1. 
   Technological change – new professions are created, old ones lose their lustre and, ultimately, their place in the economy. New professions, connected to new technologies, emerge. Some workers can be retrained but even this takes time (in which they might, technically, be defined as unemployed). Others cannot be retrained and they join the ranks of the long term unemployed, swelling structural unemployment.
   

1. 
   Changes in Consumer Preferences – Fashions change, mass consumption patterns alter, emphases on certain goods and services shift. Today's hot item is tomorrow's dead one. Whole industries can and are effected by these tectonic shifts.
   

1. 
   Globalization and Cross Border Labour Mobility – Labour mobility is intentionally encouraged, the world over. Economic unions and trade pacts include social or labour chapters. The most notable example is NAFTA which created hundreds of thousands of new jobs in Mexico and in the USA. As companies go multinational, as production processes become global, as services and goods are exported and imported within a rising tide of international trade, as international brands develop – the biggest restructuring of labour markets is taking place across the globe in rich and poor countries alike. Consider the clear erosion of the power of the trade unions or the cheap labour available in Central and Eastern Europe and in parts of Southeast Asia. These cause jobs (even skilled ones) to be reallocated across political borders.
   

1. 
   Skill Acquisition Failure – People who failed to acquire the minimum education necessary to participate in today's workforce (secondary high school) are doomed to be permanently unemployed or part time employed. School dropouts form a large part of the structural unemployment in many countries. In countries which are in the process of shifting from one economic system to another, even those with the right formal education are made redundant and useless by the new paradigm. Think about a professor of economy who studied and taught Marxist economy from the wrong textbooks – he is quite useless in a capitalist market economy and might find himself unemployed despite his high education.
   

The last, benign, type of unemployment is the cyclical one. It is the result of the natural business cycle (at least natural to capitalism) and of the ebb and tide of aggregate demand for workers which is a result of these cycles. This is considered to be an unavoidable side effect of market economy. The pain of the laid off workers can be ameliorated (through the introduction of unemployment benefits) but the solution comes from sorting out the cycle itself and not by attacking the unemployment issue in an isolated artificial manner.

The "Natural Rate of Employment" takes into account that frictional and structural employment must exist. What is left is really the full employment rate. This is highly misleading. First, economists are forced to rely on government data which, normally, tend to underestimate and understate the problem. For example: the statistics ignore "discouraged workers" (those who despaired and stopped looking for work). A second, more philosophical issue, is that, as opposed to frictional unemployment, which is a welcome sign, structural unemployment is not and must be fiercely fought by the state. But Economy give Politics a legitimacy to ignore structural unemployment as a part of life.

But the third problem is the most pressing: what is the "natural" rate of unemployment and how should it be determined? This is where NAIRU came in: the natural rate of unemployment could be construed as that rate of unemployment which prevented bad economic effects, such as inflation. In the USA this was estimated to be 5-6%. But this estimate was based on a long history of labour and inflation statistics. History proved the wrong guide in this case: the world has changed. Globalization, technological innovation, growing free international trade, growth in productivity, electronic money, the massive move to the "Third Wave" (Information and knowledge) industries – all this meant that inflationary pressures could be exported or absorbed and the employment could go much higher without fostering them. This became part of a new paradigm in economy which proclaimed the death of the business cycle and of the inflationary boom-bust phases. Though exaggerated and probably untrue, the "New Paradigm" did predict that productivity will grow, inflation will remain subdued, unemployment will decrease drastically and the prices of financial assets will explode – all simultaneously (which was considered hitherto impossible). The unemployment rate in the USA has stayed well below 5% and there are still no sign of inflation. This is remarkable (though probably short lived. Inflation will pick up there and the world over starting in 1998).

And what about Macedonia? It is one of a group of countries in transition that suffered an unprecedented series of external shocks separation from a Federation, the loss of virtually all export markets, economic siege, monetary instability, a collapse of the financial system, and, lately, interethnic tensions. Small wonder that it endured an outlandish (official) rate of unemployment (more than one third of the active workforce). Granted, the real unemployment rate is probably lower (many workers in the black economy go unreported) – still, these are daunting figures.

Is this a structural or frictional or cyclical unemployment? It is tempting to say that it is structural. It seems to be the result of trying to adapt to a brave new world: new technologies, new determinants of survival, new market mechanisms, the need for a set of completely new skills and new consumer preferences. But a closer analysis will yield a different picture: most of the unemployment in Macedonia (and in countries in transition in general) is cyclical and frictional. It is the result of massive layoffs which, in themselves, are the results of efficiency and productivity drives. It is not that the workforce is ill adapted to cope with the new, post-transition situation. The composition of skills is well balanced, the education, in some respects, better than in the West, labour mobility is enforced by the cruelty of the new labour markets, the pay is low and is likely to remain so (wage pressures don't go well with high unemployment). The workforce has adapted wondrously.

The failures belong to the management levels and, above all, to the political echelons. Unwilling to adapt, eager to make a quick (personal) buck, entrenched in cosy offices and old ways of thinking, more interested in their perks that in anything else, not educated in the new ways of the markets – they led themselves and their workers (=their voters) to the unemployment swamp. This unfortunate condition was avoidable.

There is no reason to assume that structural unemployment in Macedonia should be much higher than in Germany. The relative sizes and richness of the two economies is not relevant to this discussion. What is relevant is that labour in Macedonia is by far more mobile than in Germany, that it is paid much less, that it is, therefore, relatively more productive, that it is better educated, that both countries suffered external shocks (Germany the unification, Macedonia the transition), that both countries are macro-economically stable, that Macedonia has real natural and human endowments. By certain measures and theoretic formulas, the structural unemployment in Macedonia should be circa 9%, the frictional unemployment (the business cycle is turning up strongly so cyclical unemployment is bound to go down) contributing another 5%. The natural unemployment rate is, therefore, circa 15%.

Moreover, Macedonia is in the rare and enviable position of not having to worry about inflation or wage pressures. Even much higher employment will not create wage pressures. Only the most skilled workers will possess the ability to dictate their own wages and, even then, we are talking about ridiculous wages in Western terms. There is so much competition for every vacancy ("an employers' market") that the likelihood of demanding (and getting) higher wages (and, thus, generating inflationary pressures is all but non-existent). So NAIRU in Macedonian terms is an abstract notion with no applicability. Every additional percent of permanent employment in the West entails 2-3 as much in economic (GDP) growth. Macedonia has to grow by 10% and more annually to reduce the level of unemployment to 15% in 5 years (taking additions to the workforce into account). This is doable: Macedonia starts from such a low base that it would take little effort to achieve this kind of growth (to add 300 million USD to the GDP annually=3 months exports at today's rate).

But this rate of unemployment can be achieved only with the right policy decisions on the state level – and the right management cadre to take advantage of these decisions and of the thrilling new vistas of the global market scene. It is here that Macedonia is lacking – it is here that it should concentrate its efforts.

Communism abolished official unemployment. It had no place in the dictatorship of the proletariat, where all means of production were commonly owned. Underemployment was rife, though. Many workers did little else besides punching cards on their way in and out.

For a long time, it seemed as though Japan succeeded where communism failed. Its unemployment rate was eerily low. It has since climbed to exceed the United States' at 5.6%. As was the case in Central and Eastern Europe, the glowing figures hid a disheartening reality of underemployment, inefficiency, and incestuous relationships between manufacturers, suppliers, the government, and financial institutions.

The landscape of labour has rarely undergone more all-pervasive and thorough changes than in the last decade. With the Cold War over, the world is in the throes of an unprecedented economic transition. The confluence of new, disruptive technologies, the collapse of non-capitalistic modes of production, the evaporation of non-market economies, mass migration (between 7.5% - in France - and 15% - in Switzerland - of European populations), and a debilitating brain drain - altered the patterns of employment and unemployment irreversibly and globally.

In this series of articles, I study this tectonic shift: employment and unemployment, brain drain and migration, entrepreneurship and workaholism, the role of trade unions, and the future of work and retirement.