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Cashless Economy vs. Shadow Economy in Ukraine

Some of the often discussed benefits of digital payments are decreased time of the transaction, cost reduction on operating expenses, money processing, and money circulation maintenance, protection against robbery and counterfeiting, and increased transparency of the formation of income.

As the global pandemic is sweeping the world with novel challenges, some industries benefit more than others from the crisis, discovering new opportunities in the situation. One way to look at it, is that the health crisis has slowed down the majority of the traditional sector of the world’s economy, but also become an accelerator for the digitization processes. The lockdown that came into force due to rapid spreading of COVID-19, brought a surge in demand for the market of digital payments. Only in the first quarter of 2020 the demand for some blockchain digital transfer and digital payment platforms has increased from 10% to 40%. Such acceleration brought to the spotlight Sweden, which claimed an intent to become the first cashless economy by 2023. What has been a sci-fi movie fantasy quickly started turning into a fast-approaching reality of the nearest future and brought a spark to the discussions on whether the age of cash is coming to an end in the rest of the world? But will Ukraine follow the trend and abandon the cash? With limited ability to move and interact with people in person in the current obligation of social distancing, the need to use contactless payments and online banking apps increased drastically. According to the Page media outlet, the growth of cashless payments in Ukraine will reach from 60% to 70% by the end of 2020.

According to the Page media outlet, the growth of cashless payments in Ukraine will reach from 60% to 70% by the end of 2020.

To look at the matter from the objective viewpoint of developed economies, a cashless society brings nothing, but the benefits for businesses and increasing efficiency for the global economy. Some of the often discussed benefits of digital payments are decreased time of the transaction, cost reduction on operating expenses, money processing, and money circulation maintenance, protection against robbery and counterfeiting, and increased transparency of the formation of income, among others. On top of that, in many countries, the increasing demand for digital payments surges the growth in supply and facilitates technological and innovative development. Along with all the known benefits of a cashless economy, there are many critiques involving easy access of financial institutions to the private data of customers, intensifying supervision by a government, and risk of cyberattacks. However, the trend is undeniable, and very soon the society will be able to feel the changes brought by digitization of financial services.

Along with all the known benefits of a cashless economy, there are many critiques involving easy access of financial institutions to the private data of customers, intensifying supervision by a government, and risk of cyberattacks.

Such trends can be also perceived as the aftermath of the “Cashless Economy” project of the Ukrainian government that has been undergoing in the country from 2015 to 2020, and had as its goal to ‘to shrink the shadow economy through electronic payments’. Indeed, the government of Ukraine claims to see cashless payments increasing tax revenues, shrinking black markets, and controlling money laundering – objectively reasonable goals. Although subjectively speaking, what is understood as the shadow economy in the developed world, where it constitutes 10-20% of a national GDP on average, in Ukraine means something totally different. According to the Kyiv International Institute of Sociology, the shadow economy of Ukraine accounts for nearly 50% of the country’s GDP. Therefore, such seemingly noble objectives of the Ukrainian government to shrink the shadow economy are, on one hand, pushing the country toward the ‘European standard’, but on the other hand, suffocating Ukrainian individuals and businesses that depend with their livelihoods on objectively ‘illegal’ activities. Shrinking the shadow economy by means of supervision through digital payments will, first of all, influence not as many big corporations as millions of regular citizens and SMEs, forced to participate in the shadow economy by ridiculous laws and endless obstacles by that same ‘noble’ government. It is not by accident that only 38% of Ukrainian SMEs accept cashless payments, in comparison to 62% of European SMEs.

It is not the question of how to detect all the tax evasion, black markets, and money laundering activities, but to understand why these activities happen in the first place and how to allow businesses to grow without having to resort to illegal activities.

Of course, the degree to which an economy uses cash or cashless payments relies on multiple factors, such as the level of corruption in a country, mentality, culture and the level of literacy among the population, but, most importantly, it depends on the transparency of the economy and the degree of economic liberalization. Finally, it is not the question of how to detect all the tax evasion, black markets, and money laundering activities, but to understand why these activities happen in the first place and how to allow businesses to grow without having to resort to illegal activities. Partial reason is the regional culture developed through centuries, but such culture is simply a manifestation of much deep-rooted, systematic flaws of the governing institutions. After all, when a century after century a governing body of a country with inexhaustible creativity invents new methods to ‘legally rob’ the population, people usually have no choice but to develop a culture that would allow them to capture the economic wealth that is not being redistributed naturally. These flaws of the system are easy to pin-point by measuring the opportunity of people to start a business. To set up a benchmark, large enterprises in Ukraine account for nearly 45% of the country’s GDP. In its turn, the number of small businesses in Ukraine is currently only 16% of GDP, which is on average two-three times less than in Europe.

Even though in 2019 cashless payments accounted for 20% of all payments in Ukraine, and the forecasted growth rate of digital payments in 2020 is above 50%, exactly due such a culture of distrust of the population to the government, the cashless economy will not be developing as fast and productively as in Europe. Too many people in the economy of Ukraine depend on cash for their freedom and privacy. Fair businesses will undoubtedly welcome the proliferation of cashless payments, but first, the country needs to create conditions where fair businesses can survive without being forced to resort to the shadow economical activities.

Anna Gubanova

 

 

 

 

 

 

 

 

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