The rich get richer and the poor get poorer – that’s the summary description of the Matthew effect. The term was introduced by American sociologist Robert Merton in the middle of the twentieth century. He studied the issues of status within the scientific community, but the concept proved useful to economists too. Today it is often used to describe relations between well-developed countries and the countries aiming to join their ranks. The answer to this problem in economic patriotism which includes effective government regulation and system support of domestic business in promising industries.
In our country we can see the Matthew effect in action in the processes of European integration: the advocates of free market often overlook the fact that Ukraine is currently at a disadvantage and many branches of economy without the government support will be wiped out by the international business with its huge resources. A fair cause of “living like in Europe” turns into an unfair desire to “get Europe here and now.”
The western countries are not exactly playing fair when they demand equal conditions for all manufacturers. Back when those countries were still developing their economies were quite closed, and globalism as we see it today was not an issue. Whereas Ukraine has to make a giant leap forward and reach a new level of development, so it needs special conditions. The free market rules cannot be applied in this situation as they favor those who already are stronger. We need to make economic patriotism our priority. And significantly, we also got this idea from the western countries.
In the 1790’s the USA were recovering after the war for independence. Back then Alexander Hamilton, the country’s first Minister of Finance, urged the government to support domestic manufacturers and thus to cut down imports. This was one of the first examples of economic patriotism, it proved to be a right strategy which gradually revived the American economy. Ukraine today is facing a similar challenge. European vector or not, we must not forget our state’s interests.
The country is at a disadvantage
The Hamilton’s example also demonstrates us the prototype of a good lobbyist. I am convinced that protection of domestic producers does not have to come from one’s own financial interests as it had in Ukraine for many years now. If we are to build a civil society, we have to abandon this practice and speak of the country’s political interests such as gaining the status of a civilized market and reducing dependence on imports in the sectors where we can produce proper quality goods.
I know the pharmaceutical industry well enough to say with certainty that manufacturing standards and product quality of our producers are quite on par with European companies. There are 117 licenced pharmaceutical companies contributing about 2% of GDP. It is too bad that 65% of money people spend in drug stores end up in bank accounts of international corporations because it’s these companies who provide more than a half of medications sales in Ukraine, not the domestic producers. It is also very hard for our companies to enter the European market because of the long list of eligibility requirements including membership in certain EU associations and organizations. In other words, European countries are no strangers to protectionism.
Eric Reinert, a famous Norwegian economist and a long-serving UN consultant, has written a book “How Rich Countries Got Rich… and Why Poor Countries Stay Poor” where he proves that government protection of the national economic interests facilitates scientific and technological progress. Consistent policy of economic protectionism contributes to renewal of the country’s economy, social welfare and intellectual development advancement.
Ukraine, however, is still looking for its own path and is liberalizing at an accelerated rate while the domestic market remains unstrengthened. Here is a vivid example: our laws allow 80% of imported drugs to enter Ukrainian market without passing laboratory control and manufacture inspections. As a result today we have our market flooded with questionable drugs from foreign countries. As for western pharmaceutical companies, the problem with them is the prices which are often inflated. For example, one European concern sells the same drug in Ukraine at a price 40% higher than in some EU countries.
The biggest domestic producers have to aim at import substitution, producing all the goods the consumers need themselves. In pharmaceuticals alone domestic companies are capable of producing 94% of medications that are currently being imported. Food processing industries, especially production of sugar, tobacco products, fruit and vegetable products, baby food and diet meals, also have great potential for import substitution. According to the State Statistics Service of Ukraine, increase in domestic production of textiles, knitted clothing, footwear and wool yarn provides significant opportunities for Ukraine’s light industries. In order to achieve comfortable EU integration we need to build prosperous businesses that would pay all taxes, respect all labour rights and pay competitive wages.
Ukraine needs economic patriotism to become a part of Europe on equal terms, not as a “poor relation” waiting for new benefits and loans.