Maverick Marketeers In Ukraine Keep Quiet

Booming shadow economy is even bigger than Russia's

By , Special to The Christian Science Monitor

WHEN the Ukrainian government banned the use of foreign currency in retail sales Aug. 1, most of the affected supermarkets closed briefly to add five zeros to their price tags. They now show prices in Ukrainian karbovanets instead of dollars.

But the Volodymirskiy Bazaar in Kiev, the capital, did not flinch. In that maze of stalls thronged by bargain-hunters and patrolled by track-suited gangsters, the greenback remained valid tender.

The Volodymirskiy and countless other marketplaces, offering everything from shampoo to imported footwear, are the ripple effect of Ukraine's plunge into private enterprise. They also indicate the local attitude toward government decrees: The rules are dumb, and anyone who follows them is dumber.

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By that standard, Ukrainians are a bright lot. A World Bank study due out later this month ranks Ukraine first among the states of Eastern Europe and the former Soviet Union in the extent of its shadow economy. It estimates that the informal sector accounts for 45 percent of national output, a figure slightly higher than Russia's.

By comparison, the shadow sectors in the United States and northern Europe account for less than 10 percent of economic output, according to Daniel Kaufmann, chief of the World Bank mission here.

These percentages don't include crimes such as drug trafficking or prostitution. Instead, they capture transactions between otherwise law-abiding citizens that are not reported to the government. In the US, common examples are teenagers mowing neighbors' lawns and White House nominees hiring illegal aliens as nannies without a word to the Internal Revenue Service.

In the Ukraine, such reticence is practiced by virtually everyone, from small-scale entrepreneurs dodging taxes to state-owned enterprises hiding export earnings from the greedy national treasury.

''I deal only in cash - it's easier that way,'' says one local businessman who requested anonymity. ''We pay all our salaries in cash and don't withhold taxes. The government has created a situation where it loses out on everything.'' The man's firm paid a nominal fee to a local auditor who prepared fictitious accounts for government inspectors. The auditor accepted a much larger sum in a plain envelope.

As more entrepreneurs hide from taxes and restrictions, the government's revenues shrink. It then has to boost levies on those who remain, prompting another exodus from the formal economy. Ukraine is already considering an increase in its 20 percent value-added tax. It also levies a 30 percent corporate income tax.

Customs and foreign-exchange restrictions also tie the hands of entrepreneurs. Or maybe only at first glance: Mr. Kaufmann of the World Bank notes that Ukraine officially exported goods worth $2.7 billion in 1993. But that same year, its trade partners reported $6.5 billion of imports from the Ukraine. Most of those earnings presumably bypassed government taxes and forced sales of hard currency.

Imports also circumvent the usual channels of commerce. Much of Ukraine's imports make the journey in the suitcases of the ''shop-tourists'' - the smallest of entrepreneurs who scour the bazaars as far afield as Syria and China for goods that can be brought back duty-free and resold in markets like the Volodymirskiy.

One regular shop-tourist says she can turn a 50 percent profit on a $2,000 investment in a month. That compares favorably with the average Ukrainian's $40 monthly salary. A survey by the Social Monitoring Center, a Ukrainian research firm, found that in the city of Lviv alone (population 800,000), 10 percent of the residents shopped abroad for a living.

''Ukrainians are individualistic,'' says Alexander Paskhaver, an independent economist who advises the country's president. ''For historical reasons, they don't count on the state to solve their problems - they save themselves. That character has created this shadow economy.''

Ukraine's declaration of independence in 1991 came after centuries of chafing under foreign control. Today, millions of workers are employed in outdated Soviet-era industrial plants that have no future. Yet private initiative has allowed the nation to survive the collapse of central planning.

The World Bank estimates that while the country's official output halved between 1989 and 1994, its actual production fell by less than a quarter once the informal sector is included.

But survival has a price. Business executives who escape government oversight fall under that of racketeers who offer ''protection'' and enforce unwritten contracts. The earnings of gangsters, shady auditors, and other middlemen amount to a parallel tax system, one that doesn't distribute its proceeds to the needy. Force becomes the final court of appeal.

''This has disastrous social consequences,'' says Bohdan Krawchenko, a Canadian of Ukrainian origin who heads the government-affiliated Institute of Public Administration and Local Government in Kiev. ''The result can be the Colombianization of Ukrainian society, and once that takes root, it's going to be very, very difficult to crawl out of this hole.''

Kiev may already match the cities of violence-prone Colombia in the number of bulky bodyguards posted in front of shops and businesses. But Kaufmann suggests the drift toward lawlessness is reversible - the World Bank's surveys show that most business executives would be willing to rejoin the formal economy if the government adopted credible free-market policies.

In the past year, it has lifted some of the more odious restrictions. Most recently, Ukrainians have gained the right to open anonymous hard-currency accounts.

International institutions have encouraged Ukraine to go further. The International Monetary Fund in April approved a $1.8 billion credit to the government on the condition that it control inflation and the budget deficit. The World Bank has pitched in with a $500 million loan for critical imports and is prepared to lend another $400 million later this year.

Kaufmann says wholesale liberalization is needed to bring entrepreneurs out of the shadows. ''The unofficial economy ... [has] kept the country from collapsing. But it's a short-term panacea. It's not a long-term investment in the economy.''

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