12:00 29.04.2020

Author ALEX LOPATIN

Supporting domestic producers as a step towards overcoming the crisis

4 min read
Supporting domestic producers as a step towards overcoming the crisis

Alex Lopatin, investor, founder of American-Ukrainian company ITW Systems

On April 23, the US Department of Labor published that as of mid-March, 26 million Americans had applied for unemployment benefits. Closing down businesses, losing jobs and sources of income due to quarantine and related restrictions is the second most significant problem in many countries after overcoming the epidemic itself. Now, it is extremely important to have a mechanism at the government level to overcome the consequences.

According to the Chamber of Commerce and Industry of Ukraine, the unemployment rate in the country is 13.7-15.4%, or 2.5 to 2.8 million people. Small and medium-sized businesses are forced to completely or at least temporarily suspend operations. A number of companies that continue to pay full wages and retain all employees are forced to cut other costs or suffer losses.

It is difficult to predict how the situation will develop in the future, but it is now possible and essential to plan for recovery.

At the moment, anti-crisis measures, such as the allocation and distribution of an anti-crisis budget, in most countries, fall under three main categories of tasks:

• support for the healthcare system;

• support for citizens, especially the needy and those who have lost their jobs;

• support for business.

Of course, completely different amounts are allocated for the implementation of these tasks (for example, from 0.06% of GDP in Hungary, to 4.5% of GDP in Germany, and up to 10% of GDP in the USA). But the key point is not so much the amount of money, but the mechanism and objective - the government must be genuinely interested in helping citizens and businesses, act quickly, cohesively and effectively.

There are a number of countries, such as Moldova, Romania, Georgia, Slovakia and others with GDP not greater than or even less than Ukraine's GDP, but they have undertaken several anti-crisis measures with very positive results. There are several approaches that the Ukrainian government could also adopt, as these measures do not carry a financial burden on the country's budget but are quite effective.

One of such tools for providing support may be to create certain privileges for domestic producers. As international practice shows, such programs are already being implemented in some countries and are proving effective. After overcoming the epidemic, utilizing all means available to save their companies and to help the population, saving jobs in times of crisis, Ukrainian producers have earned the right to expect certain preferences. It does not require any financial investment from the government, yet it will jumpstart the domestic economy and allow businesses to resume work after overcoming the epidemic.

A good example of supporting domestic business is the US energy efficiency program. The basic idea is that on one hand, the government provides financial support to organizations ("green" tariffs, affordable credits) that implement energy-efficient solutions, and on the other - the condition for obtaining support is the purchase of products “Made in America”. This model works and is supported by taxpayers, as it promotes the development of local/domestic businesses and job creation.

A few years ago, I was pleasantly surprised by the example of Bahrain and its approach to supporting domestic business. During my business meeting with their Minister of Energy, he spoke about the privileges for local producers: when participating in state tenders, if a local manufacturer's offer does not exceed the value of other offers for a similar product by more than 15%, then the preference is given to the local manufacturer. The logic is obvious: local production results in additional jobs, wages, and, through consumer spending, gives additional tax revenue to the budget.

Equally effective is the support and business development measure of capital repatriation tax as an alternative to income tax. If a business does not withdraw funds from the business but instead reinvests them into expansion and development, then these funds should not be treated as profit and taxed as such. Expansion of production means new jobs, purchase of equipment and materials, an increase in turnover, etc. This, in turn, will help grow the budget through other taxes, such as VAT.

Of course, the COVID-19 pandemic is a tragedy that has affected virtually the entire world. Nobody expected this and as a result, nobody was sufficiently prepared for it. Therefore, the consequences of COVID-19 for the population and the economy depend to a large extent on the timeliness of the government's actions, on the systematic approach, and strategic decisions.

 

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