Modernization and consolidation

The Russian project polit.ru, which began six years ago and focuses on the organization of public lectures of prominent scholars, entrepreneurs and politicians, took deep roots in Ukraine, in the form of polit.ua. It recently celebrated its first anniversary in the Kyiv House of Scientists. The president of the Institute of the National Project “Social Contract” (Russia) Aleksandr Auzan was invited — he gave the first lecture in Kyiv at the project’s beginning. Last Thursday, evaluating the work done, he noted that “the project, while still being international, obviously becomes more and more Ukrainian.” Indeed, along with two Russian members of the round table, Aleksandr Auzan and ambassador of Russia in Ukraine, Mikhail Zurabov, it was attended by two Ukrainian speakers: the president of the Center for Economic Development Oleksandr Paskhaver and ex-foreign minister, Chairman of the Council of the National Bank of Ukraine Petro Poroshenko. The Day presents the essential elements of their discussion.

Oleksandr Paskhaver:

“Outside observers characterize the new government, especially when compared with the previous one, as full of determination, energy, and capacity for large projects, the ability to work in a team and quickly correct obvious errors if these errors are not part of a bigger plan. But the most surprising feature is a systematic liberal rhetoric which we did not expect (although rhetoric is not action, but if you constantly repeat the same thing, this might somehow influence your behavior, too). But these positive experiences should be looked upon also in terms of the extent to which this government implements its promises.

“I think it largely depends on what we, the citizens of Ukraine, are. It’s we who are limiting the country’s development. We have two negative peculiarities: our stateless past and the post-colonial, post-Soviet syndrome, typical for the average Ukrainian citizens. After 70 years of destruction, we have lost our tradition of self-organization and collective self-defense. Add the psychological trauma of the Great Famine, which resulted in the active part of the population, the rich peasantry, being destroyed, while it would be now very useful for a market economy. Simultaneously, the very thin layer of bourgeois intellectuals was destroyed, too. This applies to the east of the country. As for the west, there one in ten suffered as an opponent of the Soviet regime. These traumas have reached posterity. For example, those who survived the famine remained silent and did not tell the children and grandchildren about their ordeals. Even more dangerous is our tradition of contempt of the law. We have grown used to considering corruption as an acceptable sin. We neglect the human rights, even our own, especially concerning our private property.

“This set of qualities affects our elites. Because of our statelessness, our elites lack experience of strategic management, lack traditions of service to the state [...] But we also have different values in the west and east of the country. If the west is dominated by traditional values, Christian, arural way of life, then the east is by an industrial way of life, culture of workers’ settlements. If the west has a well-defined, strong ethnic identification, then the east has a very weak identity. If you ask the western Ukrainian, who he is, he would call himself a Ukrainian, while a person from the east would send you to hell with such requests. Here we observe the great influence of several immigration waves, which, essentially, repopulated our east after the Great Famine, after much of the population disappeared in the pre- and post-war industrialization, which created a certain atmosphere in the east.

“In these circumstances, the features that we identified in the new government can be very useful if used properly. But they can cause very deep strain, if the authorities are not controlled by society — if society is not clearly directed to a specific purpose and consolidated. In this regard, I would have singled out two types of risk. The first one is linked to this energy, determination and ability of the new government — all this may serve their personal interests. [...] The present government is dominated by representatives of big business. They psychologically perceive their work as a major business project. But in projects of national scale economic efficiency is not all-important. The social impact is far more important...

“The second risk concerns reforms. This, of course, is the most important element of the current government’s rhetoric. But the reforms that have anti-bureaucratic objectives were assigned to the bureaucracy. This is a guarantee of failure. I’d cite James Scott of Yale University. He showed that the reforms carried out without regard to their social dimension, without strong feedback from the community led to social disaster. These necessary characteristics are not present in our country.

“Finally, I wanted to tell the authorities that it is very difficult to modernize society if you do not consolidate it. It simply refuses to yield to modernization. Our first two presidents were quite cunning in what concerns social policies. They consolidated society. President Kuchma had such a personnel policy: he took people from the western regions for the formation of state ideology and state structures, and people from the east for the formation of the economy. Once one of Kuchma’s opponents said, quite caustically, that under him a creeping Ukrainization flourished. However, this process did not provoke conflicts. He united society and did not allow it to fall apart. Later this quiet approach was replaced by the confrontational policies of President Yushchenko. And President Yanukovych does essentially the same thing, just the opposite. In all his plans, he focuses exclusively on their electorate, while Kuchma favored nobody. A confrontation-inclined government is also a very important risk for our country.

“Naturally, a pendulum may be one of the options for our future. The country can be forced to follow this or that policy and be consolidated through force, rather than tolerance. But can Ukrainians bow their heads? I once talked to our well-known dissident Semen Gluzman. The point was whether or not Ukraine will repeat the schemes of totalitarian governments, which we see around us. And he said: ‘No, it’s impossible. Why? I served for seven years in the forced labor camps. I did not see any Belarusians there. Camps were overcrowded with Ukrainians.’ I think this is the guarantee that the problems of our country can’t be solved by force... There are other options. One of them comes from the fact that the new government learns quickly (they are really good learners) that the social component must be put ahead of business projects. There is a second option, it will simply be replaced by a government which had already learned its lesson. And there is a very bad option that should be considered; it is the break-up of the country, if we continue to govern it in such a confrontational way. These are the forecasts. The question is which one will come true...”

Aleksandr Auzan:

“I would like to offer you controversial theses on two issues. First, during the years of crisis Russia has become quite a different country without many of us noticing it. And it concerns new social constraints. I am talking about the new policy to increase pensions, which created the happy majority in Russia. What options were there in 2008, when the crisis erupted? It hit our countries hard. Yours fell even worse, but we also did very badly (one of the World Bank’s officials said: ‘I was born in Punjab and in my youth knew that the world was engulfed in the struggle between two countries, which determined the future, and these countries were America and Russia. Then it turned out that the world was mono-polar and Russia was part of a wider group of countries, then it turned out that this country is developing one, the weakest of the BRIC countries — Brazil, Russia, India and China.’ And finally the banker said: ‘Gentlemen, your ship is sinking, only very slowly’). So the blow was very strong, but not enough to move the trajectory of my country, which was what needed to be done, because we are on very bad inertial trajectory. But on the other hand, the crisis did lead to very serious changes that must be discussed, and new social constraints.

“What were the options? In Russia, unlike Ukraine, at the beginning of the crisis and even today, there were significant financial resources, which might have been used in different ways. One could support the producer, owner or builder of infrastructure. Another way was to give money to the public. The first impression on the government’s actions was that they were saving the property-owning class. But after saving them, the following step was not saving the producer but pumping the money to the public. How could this be done? By helping the budget-dependent population, primarily pensioners. Moreover, economists, and not only they, understood that during a crisis the government had to focus on infrastructure. This is the most favorable time to build roads, haul fiber optic lines, and then multiplier will kick in. But wouldn’t this money be stolen?.. Therefore, we need to establish good institutions. But how? It is not clear. So the easiest way is to, as always, spend the money on pension distribution schemes. There would be thefts too, of course. But they would be smaller. As a result, we created a level of social guarantees that Russia might somehow maintain to 2012 or 2014, and it’s unclear what to do afterwards. But so far Russia’s socio-political situation has changed. The situation of pensioners has strongly improved. The replacement ratio rose to almost 40 percent, which is a lot for Russia. Pensioners have become respectable people. But now, to maintain this level, you need to spend more budget funds on it than on the military. And this is in Russia! How do you like it? The government became very stable and strong — that’s it, they have found their primary voters. But no one knows how to maintain this system in the future.

“This system, these social obligations of the state require action. [The pensions] may, of course, be easily lowered by inflation, but this also deteriorates conditions for economic development, not to mention the political implications. This problem is not solved elsewhere either. It’s a global challenge. It is connected with rising life expectancy. This process, incidentally, happens in our countries, too. By the life expectancy of Russian women at retirement, we are third in Europe, after Italy and France. The men’s situation is quite different … But in what concerns women, there are obvious changes. How to solve this problem, which is at the same time social, political, economic? You can cite historical examples. On August 8, 2008, Institute of Contemporary Development was to submit to President Medvedev proposals for alternative approaches to pension reform. In Ukraine, probably, there are confused memories on what happened on August 8 (laughter in the room). There was a war with Georgia. Then there were some attempts to re-schedule the meeting, we were told that the president understands how important it is... However, I did not believe them and said: ‘the meeting will take place, but not with us — he’ll meet the Security Council.’ This is understandable. And in October, they signed a plan which led to the situation I described, and that defines today’s non-modernized new political and economic face of Russia.

“What is the essence of the proposals, which we then tried to promote? Why do we account for the retirement balance like ordinary accountants? Following this approach, the holes in the pension fund should be closed by the budget. But why do we consider pensioners as an object, not as a subject? It is not clear. But if one treats them like a subject, as we have offered, then the picture is different. Indeed, a current, that is, Soviet-era pensioner will receive a pension from different sources than, say, a pensioner 20 years from now. For the former, the responsibility is with the treasury, not with the pension system. Because equipment which he produced is still working, beyond all time limits of depreciation. And if that source exists, then we will not have this problem, it will be solvable. As for future generations — there is also no problem, because to them, in fact, there is no obligation. Again, there is no obligation towards those who are now 20 years old. They are given various opportunities for the formation of pensions. The state merely pledged to support these rules and to ensure their stability. The problem is with my generation. Because we do not have time to participate in the new system and had no time to create anything robust in Soviet times, so that the state could pay us the normal pension. But frankly, with my generation there are also no problems. Because we did not expect that the state will help us. We have seen what was happening, and, each in his own way, tackled these tasks, accumulating money, buying some real estate. Our mission is to preserve the property we acquired.

“Concluding this part of my speech, I want to announce an idea for consideration. People, fortunately for some, and unfortunately for pension systems, begin to live long after working age is past. It’s a global problem. In England, for example, of the current 60-year-olds, one-third will live to a hundred years and within the group of current 40-year-olds this will be every second. This means the collapse of the pension system! Now families will have four different generations under one roof. My grandchildren, thank God, will have great-grandmothers, who take an active part in their upbringing. There was a time of three-generation families, and long ago, in ancient Greece, old people were those above the age of 45. They were old and infirm, and could only do basic tasks. But Plato’s head gave birth to a brilliant idea: they can and should lead the country. Rome implemented the idea of forming the Senate of those people who could not carry heavy weapons. They had to decide where to carry them! As a result, the state became very successful and expanded. I claim that the person or, rather, the country that finds a good use for the fourth generation, will have tremendous advantages over the others.

“And finally I want to say a phrase, which I lately often use to cheer myself up: life is beautiful if you find the right antidepressant.”

Mikhail Zurabov:

“I would like to share some thoughts on what we heard. In my life there was a period when I had the opportunity to really implement what I wanted to do. And I barely had to explain to anyone what I did. To this day few people understand what the point of my plan was. The reason was that it was almost impossible to agree on what to do. Ultimately, the responsibility always lies with the person in charge, and they should accept it. I advise, if you have a plan and you realize that the opportunity to implement it is there, then you should try to do it. Refusal to act is inexcusable.

“At that time I have sometimes appeared in public, because at this point you could clarify who, as they say, is to blame for the disappearance of your favorite slippers. Once, at Kira Pashutinska’s TV show, we discussed whether to raise salaries for doctors. I argued that it would be reasonable, especially if you do it wisely and not for all, but rather with some goal in mind. In the discussion, I defended my point of view to the best of my ability, parried opponents’ remarks and watched the audience’s reaction. Then they voted. You will not believe, but 67 percent voted for the low salaries of doctors. I was shocked at the lack of understanding among the people. I thought long and finally found an explanation. In the minds of Russians, an architecture is still present that evolved with the emergence of county doctors. Everybody prefers to personally pay the doctor at least a small amount. But it is necessarily done personally, to ensure an attentive attitude. Any increase in the doctor’s income means a corresponding increase in the required payment. If the amount you can commit to it (compared to the doctor’s main earnings) will be negligible, then from the perspective of the patient, the doctor will not do their duty properly.

“There is a rule: do not carry out reforms in an economic downturn. Reforms during a recession are called shock therapy. For you reduce liabilities in circumstances when people have no money. One of the challenges of the current Ukrainian government is that it understands the urgency of reforms but has no safety cushion. Quite possibly, this construction of a robust management structure for resources and decision-making is connected with this problem. We do not live in the West, where the bulk of the population have their savings, their homes, which no one seizes, and never lived through a currency reform. There extent of social support was never as important as in Russia. And if you want to live through a crisis period stably, coming back to reforms later, you have to take measures for the social support of the population to the maximum extent possible. These are the basics. And no one pays attention to the consequences. This is a question of survival and stability. Why was the social reform chosen? Here I fear to appear immodest, but I declare: the pension system in Russia is the best social institution of all. In Ukraine, few know what it is. I repeat: this is the most powerful social institution — an organization that sustains a record 110 million accounts, that re-calculates six million pensions without the presence of a pensioner (I mean working pensioners), and two million people receive their pensions according to personalized account data, that keeps records for 60 million accounts...

“The most important question is: how could we channel social transfers to households other than through pensioners? Moreover, Russia, and also Ukraine, I hope, are, to some extent, countries with rather strong family ties. And help to the elderly could assuredly be transformed into help for children. If you channel the money through parents, the money doesn’t always go where it is most needed. Elderly people always act as a more responsible subject of family management.

“The Soviet Union practiced a ‘correct,’ but, unfortunately, inefficient model. Management of the social behavior of the population was carried out through its hundred percent employment, and thus all guarantees regarding specific individuals and households, even with relatively low incomes, were implemented. This guaranteed a certain stability. It was executed through the mechanism of enterprise administration, of party, trade union and Komsomol organizations, the distribution of benefits and services — housing, jobs, etc. But the fact that all enterprises worked according to the plan and had clear prospects had no relation to the real economy. Finally, the system came to its tragic finale. This was because in a global competition, and with an inability to isolate people from the rest of the world, there was no transfer of advanced standards, ideas and views to our country. Now imagine this system having been suddenly eliminated and the labor market formed, but there was no institute (they exist in all countries) which would manage social behavior in these conditions. You had to create it. I would say the biggest problem was to distribute public consumption funds and reform the population’s incomes. This task was not completely fulfilled in any of the post-Soviet countries. So as long as we have not solved the problem of translating public obligations to the budgets of households with an increase in their income, we will not be able to talk about the emergence of a stable political system. And when you talk about income, then the end group, as Aleksandr Aleksandrovich said [Auzan. — Ed.], are retirees. When you do increase their incomes, it does not mean that you will continue to reduce these incomes by inflation. But imagine that we have solved that task. Even then, we would be not a step closer to talking about our prospects and social constraints without worrying. The problem is that the system that underlies the European, and to a lesser degree the American and post-Soviet welfare model, that is, the system of Bismarck, is dead. It no longer works. People are trying to make it work because of sheer inertia. The tragedy of the situation is that over the past 15-20 years no one has found a way out of this situation. In the West it is feverishly looked for, while we assume that they have already found it and they have useful experience for us. But it is absent, unfortunately. Whence the permanent budget deficit in Europe? It comes from their social obligations, which they are covering at the expense of borrowed funds. And how will they return the money?”

Petro Poroshenko:

“Our discussion is very timely. Its theme is very actual for Ukraine at the moment when the government is embarking upon, or just declaring their desire to initiate, reforms. Can they be started, should they, when should they and what should be their depth — now there is simply no certainty in the various sectors of Ukrainian society and no unified position in Ukrainian politics. In my view, reforms should be carried out. There is no alternative to reforms in Ukraine, despite the thesis that they are not to be carried out during a downturn, as there are no physical resources for them, and that a reform started in downturn is doomed to be unpopular due to lack of financial cushion. However, they can not be dispensed with.

“The world, or, at least, developed countries, have lived beyond their means. Budget deficits indicate that standards of consumption do not meet levels of production in these countries. Economies of most developed countries have simply become uncompetitive. That’s what determined the depth of this crisis and the lack of clear exit strategies. Fiscal mechanisms to overcome the crisis in the form of a sharp reduction in public spending and serious reforms, which were attempted by politicians in most developed countries, have been exhausted. Politicians, by the way, paid for it with their ratings. Today we are witnessing a dire situation in the US, where the reforms may not be carried out since the level of support for the president and the Democrats shows that these reforms will soon be impossible to pass through the Congress. The situation in France is not any better... The talented financier, former Prime Minister of Great Britain Gordon Brown paid a high price for his reforms, even though without them the consequences of economic crisis for this country would be much worse. The threats facing Britain are incomparable to those that were and remain for Greece, Ireland, Spain, Portugal and a number of other countries.

“Therefore, the reforms in Ukraine are necessary, inevitable and possible. I would not want to give some assessment of political developments. But the discussion on threats to democracy, freedom of speech, and human rights is certainly warranted. As a politician I understand the critical importance of this discussion, but if you look at it from an investor’s perspective, it is not an accident that they all applaud the abolition of constitutional reform, stability of the government, predictability and the abolition of elections. For to them the situation in, say, Belarus is much more understandable and acceptable than it was in Ukraine before the last presidential elections. So, without justifying the political processes taking place in our country, and without evaluating it, I can state that the country has a long time for reforms. Moreover, there are decision-making and implementation mechanisms in place. And the first steps of the reform are here — raising tariffs for utilities, raising gas prices, declared liberalization of tax law, (I hope that it will be implemented). These steps will have to be paid for with political ratings, but without them it is impossible to revive the economy and start living within our means. And the consequences of inaction will be very serious, indeed.