Despite fighting in its East, Ukraine has the chance to end a generation of stagnation with out-of-control corruption and become a thriving market economy with the rule of law, argues a timely new book.
Teetering now on the brink of depression, hyper-inflation and financial default, unless the country seizes this opportunity to break cleanly with its Soviet past, warns liberal economist and former Swedish diplomat Anders Aslund, Ukraine could cease to exist as a sovereign state.
It will take strong medicine to cure Ukraine’s terminal disease, Aslund argues in Ukraine: What Went Wrong and How to Fix It, recently published by the Peterson Institute for International Economics. It will take what Aslund calls “radical, comprehensive, and front-loaded reforms.”
With the recent news that the economy collapsed at a nearly 18% annual rate in the first quarter of the year, time is running short. Yet the country’s existential crisis, triggered by war, ironically makes radical reform easier, not harder.
In a similar vein, Ukrainian-American political scientist Alexander Moytl of Rutgers University agrees that losing its previous industrial heartland in war-ravaged parts of Donetsk and Luhansk provinces could be a blessing in disguise.
Aslund argues that, by weakening the influence of corrupt multi-billionaire businessmen known as “oligarchs” who made their fortunes in that war-torn region, war also ended their de facto veto over radical reforms.
Still, he insists, radical economic reforms first required a radical political change, because “systemic change…requires hundreds of new laws.”
Ukraine made that radical political change in 2014. Once President Viktor Yanukovych abandoned office in the face of massive Maidan street protests in February, Ukraine held “snap” elections for president and parliament. Each election produced a mandate for radical economic reform, including reorienting trade from Russia to the EU.
Two new leaders — President Petro Poroshenko, elected last May with a 55-percent majority, and Prime Minister Arseniy Yatsenyuk, who formed a five-party majority coalition government after more elections in October — have already started adopting some of the reforms Aslund’s book prescribes.
Last year, the parliament passed a long-overdue “lustration law” to start purging corrupt judges, prosecutors and tax collectors, some in office since the end of the Soviet Union in 1991. Additionally, President Poroshenko first negotiated two cease-fire agreements, then convinced the IMF and the EU to extend emergency “bail out” loans that have bought Ukraine time to enact more reforms.
Finished at the end of last year, Aslund’s book still serves as a road map to how much further Poroshenko and Yatsenyuk have to go. Instead of cautious or random reforms, it argues that only a comprehensive package of bold reforms could break the vicious cycle of corrupt “oligarchs” buying up political influence to block rule of law and subvert democracy.
Aslund claims four more radical reforms — purging corrupt government officials, balancing the budget, ending price controls that enrich oligarchs, and fixing deteriorating health and education services — could finish dismantling Ukraine’s deeply corrupt system.
First, Ukraine should “purge” legions of corrupt Soviet-era officials and replace them with young Western-trained professionals in a new, merit-based bureaucracy. The sprawling, anachronistic Soviet-era “inspection” agencies that torment legal business should be dismissed while reducing high regulatory costs of doing business (as measured by the World bank).
Second, the country’s extraordinarily high government expenditures should be cut, even more deeply than the IMF and potential foreign investors now demand. One obvious target is fraud-ridden Soviet-era government pensions that beneficiaries start collecting earlier than elsewhere Europe. Another is a loophole-riddled, high payroll tax that encourages cheating.
Third, and most importantly, Ukraine should stop keeping the price of natural gas, oil, and coal so low that it costs the government fully 10% of GDP in subsidies to consumers and business, stifling domestic production, creating dependency on Russia, and enriching a handful of multi-billion-dollar “oligarch” traders.
Fourth, health and education services could be improved by closing Soviet-era hospitals and schools under-used by a shrinking population. Selling off some of them could finance pay raises for remaining health and education providers, Aslund points out.
If Ukraine can sustain such a package of mutually-reinforcing radical reforms the rest of this year, Aslund concludes, then it could transform itself from a stagnant, corrupt failure into a thriving success.
Specifically, Aslund envisions a Ukraine that, by the year 2020, succeeds in: reducing its Corruption Perceptions Index rating from 144th now to only 55th (like Georgia); trims its spending from 53% of GDP now to only 35% (like Latvia); finally enjoys honest judges, prosecutors and tax collectors; completely eliminates those perverse energy subsidies; improves education, health and family services; and, grows at a 6% annual rate, in part by unleashing energy, agriculture, and exports.
Naturally, voters could be expected to reward reformist leaders bold enough to bring about such a transformation, as they have in other Eastern European countries that implemented radical reforms like Poland, the Slovak Republic, and Estonia.
The crucial assumption Aslund makes to paint such an optimistic picture is that the current, fragile ceasefire in the East holds. So, he probably would agree that Ukraine now faces two existential questions.
First, will Russia break the ceasefire to expand its covert war from the East to the South, perhaps to seize a “land bridge” to the annexed Crimean Peninsula? In that case, even the most radical reform package, and the most generous IMF and EU bail outs, would founder.
Second, will Ukraine’s current reformist leaders, and the voters who elected them, expand on a promising start to enact truly “radical reforms”? If they lose their determination, or entrenched corruption thwarts it yet again, then Aslund agrees that the economy, and perhaps even a sovereign, independent Ukraine itself, could still collapse later this year.