Maverick Marketeers In Ukraine Keep Quiet
Booming shadow economy is even bigger than Russia's
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.Skip to next paragraph
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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.
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.