the west has only made things worse in ukraine
when democratic revolution triumphed in ukraine almost three years ago, western leaders embraced it openly and provided moral and proactive support to ukraine’s democratic forces and civil society. the west immediately recognized president poroshenko and prime minister yatseniuk as the country’s new rulers and sent an army of advisors and consultants to help build a new ukrainian state. pro-america officials from eastern europe and georgia comprised a significant number of top officials in the new government.
the u.s. helped secure a crucial imf loan for ukraine, saved it from default by helping to restructure ukraine’s foreign debt and took the exceptional step of providing government guarantees for the nation’s bond loans on the eurobond market in order to lower the rate.
politicians in washington almost three years later can’t hide their disappointment and irritation with the slow implementation of reforms in ukraine and failed attempts to battle systemic corruption.
the advantage of a perfect hindsight gives us an opportunity to analyze major u.s. recommendations to ukraine about the reform process and the reasons for its failure. should we blame the slow pace of reforms, conservative thinking or the obstructionist new government?
before answering the question, a small caveat. phrases like, “washington believes that” or “u.s. officials suggest this” have been taken as dogma by politicians in kyiv. top down, from the president to lawmakers, officials have regarded these recommendations as instructions. implementation could be delayed, but the measures had to be taken. others in ukraine, meanwhile, were left wondering whether u.s. officials had even devised, much less agreed upon, a coherent strategy for reforming ukraine’s economy.
u.s. policy on the russia-ukraine conflict was more straightforward. top american officials stated clearly that russia’s annexation of crimea was illegal and maintained that kremlin leaders were responsible for the subsequent invasion of eastern ukraine. thanks to the adamant position u.s., ukraine was not quashed by putin’s military might.
when we look at economic reforms, however, we see ambiguity. u.s. academics from opposing camps, adherents of many theories, from libertarians to neo-keynesian economists to socialists, promoted their remedies. one can blame ukraine for following blindly the recommendations coming from washington, instead of choosing its own national economic policy. officials in washington share the blame, though, because they have been hell bent on enhancing the government’s crime fighting role and raising taxes.
some of the best examples are new policies to fight against corruption. milton friedman argued that one can’t fight corruption with force and should address it with economic tools (such as bonuses and options for top-managers). in addition, he said it was a good idea to keep the government from becoming an actor in the domestic economic market.
the obama administration preferred a different approach. yes, the u.s. helped ukraine create the national anti-corruption bureau of ukraine (nabu) and even an anti-corruption bureau in the general prosecutor’s office (gpo). the u.s. federal bureau of investigation worked closely with ukraine’s sbu state security service and provided state-of-the-art corruption monitoring equipment. u.s. assistance agencies even provided grants, which were used to raise the salaries of prosecutors and investigators, who were digging up dirt on potentially corrupt public servants.
however, one should keep in mind that an average monthly salary of a ukrainian government official is $100. government ministers make less than $1,000. there were recently debates in parliament about raising the salaries of legislators from $150 to $300 per month. can anybody sincerely believe corruption can be suppressed by enforcement? why didn’t it occur to any of the hundreds of imf and world bank advisors deployed to kyiv that it would be a good idea to sack apparatchiks in the bloated bureaucracy proportionally, while increasing the salary of those remaining? did it make sense to flood ukraine with microphones and equipment? how did western advisors expect public servants earning $100 a month to manage billions of dollars worth of state assets without taking bribes?
opposing ideologies were also only display during the failed attempt to introduce liberal tax reforms a year ago. the measures were meant to reduce the fiscal share of gdp from 47% to 35%. research studies by hundreds of ngos, thinks tanks, and business associations demonstrated the changes would lead to an increase of state budget revenues and would remove a significant part of ukraine’s gdp (60% according to the world bank) out of the shadows. which key reformer politician prevented the measure from being adopted? former ukrainian finance minister natalie jaresko. she ultimately resigned, but ukrainians will always remember her justifying the measure by saying the country had obligations to the eu to raise taxes. instead of reacting with an ironic smile, the financial times and the wall street journal took her quite earnestly.
the result of “tax reform” buried the dreams of three million ukrainian businessmen and businesswomen who spent the last quarter of a century building capitalism, entrepreneurs who overcame more than two decades of endemic corruption under past authoritarian presidents. “this is what america believes is right” was the rationale for adopting the measures. on december 31, 2015, ukraine’s finance ministry urged parliament to reject the most radical tax reforms ever proposed in the eastern europe. most of ukraine’s economy remains in shadows as a result.
another mistake was the u.s. position on selling land and privatization of large state-owned companies. traditionally, going back to soviet times, the government owns much of the country’s industry and manages it inefficiently. it remains illegal in ukraine to sell agricultural land to foreigners or local investors.
many ukrainians believe capitalism implies a different paradigm: industry should be private and land should be tradable, just like it is in the u.s. and europe. some socialist government leaders in europe may disagree. this may explain calls to support state-owned enterprises and limit land sales.
what was the position of top u.s. economic advisors, imf officials and washington insiders on these key issues? well, let’s put it this way: they were not pushing for it. as we have already mentioned, ukraine’s government would have welcomed support from their american colleagues. unfortunately, they were not particularly gung-ho about it.
so here were are today after three years later of piecemeal reforms, we’re left figuring out who is to blame and pointing figures. should be blame it on lazy ukrainians or washington officials, who were weren’t persistent enough?
a growing number of ukrainians today believe that a classical liberal non-keynesian economic policy would the best option for a developing nation that has chosen to be part of the western world. there should be no place for european socialist sentimentality in the new ukrainian economy. just give them a fishing rod and you will see the market’s invisible hand make a big splash.