Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

“The plan A hasn’t worked. Now you need a plan B”

Erik REINERT has outlined how Ukraine can survive and get rich
16 April, 2018 - 15:59
Photo by Ruslan KANIUKA, The Day

Professor Erik Reinert is writing a new book. This time, it will say a lot about Ukraine – our lessons, successes, and defeats. The independent life experiences of the former Soviet republics: who has managed to build what and why – is the main subject of scientific inquiry for the founder of the Other Canon Foundation and the author of the global bestseller How Rich Countries Got Rich and Why Poor Countries Stay Poor.

In an exclusive interview with The Day, Professor Reinert shared some observations that will be included in the new book, expressed a personal observation that there were some processes in Ukraine which he could not understand, noted the three steps for which we may be “praised,” and compared Ukraine with England.

We met the day after his lecture within the framework of the young scientists’ conference “Economic Future of Ukraine.” As before, Reinert sharply criticized the IMF and opposed the cooperation of Ukraine with the Fund. The EU stands accused by the professor of neo-imperialism policies (which, in his opinion, the EU applies also to Ukraine) and of short-sightedness. Professor Reinert is rather skeptical about sanctions against Russia, although his evaluation deals with their purely economic impact rather than the political one. The only thesis of his that is more or less consonant with current Ukrainian policies is the need to develop our own production capacity. The professor repeatedly emphasized a thesis which can be summarized as one of the important thoughts of his book How Rich Countries Got Rich and Why Poor Countries Stay Poor: do not listen to those who advise you, do not do as they say, do instead as they themselves did.

Professor, do you already have an answer as to why Ukraine entered a wrong path that has led us to war, territorial and human losses? At a meeting with a former economic adviser to the president of Ukraine, I heard him make a frank confession: “We did everything that the World Bank, IMF wanted us to do...”

“I think you are right to ask that question! The Americans have an expression: ‘nice guys finish last.’ And Ukraine was the ‘nice guy’ that did everything the West asked for.

“The experiences of the former Soviet republics are extremely diverse. At the moment I am gathering evidence from the different countries in order to see where the lessons are here: who has done best, and who has not done that well, and why. I just arrived in Ukraine from Belarus, and the comparison is very interesting. Belarus was the country that turned the least to the free market, right? And they used to be at the same level of GDP per capita or real wages as Ukraine, or lower. But now, the level of wages in Belarus is about twice that of Ukraine. And that is extremely surprising. It should have been the other way around.

“I think the main reason is, as I have been saying here in Ukraine, that it is better to have an inefficient manufacturing industry than not to have any at all. Belarus has an advantage in getting cheap oil from Russia, and they have a very sophisticated oil refining industry and sell high-quality fuel in the West. They also have a very successful information technology park, an IT park, which was established with no government support. I interviewed the guy who founded it, he used to be the Belarusian ambassador to the United States. So Belarus – often called ‘the last communist country’ – represents a relatively successful mixture of state-owned capitalism and successful high-tech private companies. A mixture that presently produces a wage level twice that of Ukraine.

“The strange thing is that the two countries that perhaps turned most immediately and most, so to say, radically towards global market economy – Ukraine and Georgia – are now countries where all segments of society (in Georgia almost all) are poorer than they were when communism collapsed in 1989. The data showing this has been put together by Branko Milanovic, a former World Bank economist teaching in the US.

“If somebody had told me in 1989 that in about thirty years some former communist countries will be poorer than they were under communism, I would have said: ‘That is impossible.’ After all, communism was not a very dynamic system. But if we compare China and Belarus on the one hand and Russia and Ukraine on the other, there is probably something to learn here about an optimal speed of transition.”

“THERE IS AN ENORMOUSLY POWERFUL RHETORIC OUT THERE, AND THEN THERE IS A VERY DIFFERENT REALITY. AND YOU HAVE BEEN LISTENING TO THE RHETORIC AND NOT LOOKING TO THE REALITY”

“There is another important issue that you may want to raise here. What we all failed to see clearly was that communism and neoliberalism were both cosmopolitical ideologies, in the sense that the nation-state didn’t matter.

“And it seems to me that Ukraine and Georgia did not go through the stage I would call ‘healthy nationalism.’ Healthy nationalism is when you try to protect the interests of your own country, but you also allow all the countries to do the same thing. The 19th-century nationalism in Northern Europe was of this kind. Functioning nationalism must be a symmetrical idea: ‘I protect my own interests, you protect your own interests, and we can still find a common ground.’

“I spoke to a young Belarusian economist, educated both in England and in the US, who said: ‘I tolerate this government, because they have an understanding that economic structure is important for the nation.’ So, people may not love their government, but they respect the way the government understands the country’s problems. I think this is important.

“When you look at history, at what happened in the 1930s, the two nations that were the newest of the important nations in Europe – Italy and Germany – both rejected very strongly the cosmopolitical theories, they rejected both communism and Western liberalism. And what we now see in the US when free market liberalism/libertarianism is dying: what we get is not a very nice form of capitalism either.

“And when you look at Ukraine from this perspective, I think you were too keen in taking the advice of the West, and you were not nationalistic enough. You went from believing in one cosmopolitical utopia into believing in the other one, and history has proved both to be wrong. If one political extreme is wrong, it does not follow that the other political extreme is right.

“And I think you were told things that were not true, about the benefits of free markets and free trade. Do you know when the EU dropped its last tariff on Japanese cars? The last ten percent? That last ten percent on Japanese cars in the European Union was scrapped in December 2017. And nobody talks about this. There is an enormously powerful rhetoric out there, and then there is a very different reality. And you have been listening to the rhetoric and not looking to the reality. You are not the only ones. What the Americans used to say in the 1820s is still valid: ‘Don’t do as the English tell you to do, do as the English do.’ And you should also not do as the EU and Americans tell you to do, but do as the EU and America did. Don’t listen to the propaganda version of how these countries got rich, look at what they did and still do. This is the basic message. And Trump – in a strange way – shows the rest of the world that the propaganda version of capitalism no longer works, even in the United States. The falling living standards in the EU periphery are sending you the same message: their rhetoric does not work.”

Russian media say that you spent some time in Kazakhstan, and even advised the local government. Is it true?

“Well, no, I haven’t been there. But I am going to speak in Uzbekistan now in April.”

“THE GREAT SUCCESS OF ENGLISH INDUSTRIALIZATION STARTED WITH AN EXPORT DUTY ON RAW WOOL, JUST LIKE YOUR CASES OF TIMBER”

It has just occurred to me that this is how your advice worked in Kazakhstan. Indeed, Kazakhstan is going through an interesting transformation in the context of the introduction of new rules for big capital, which can become a model for Ukraine.

“I think there is something to be learned from Belarus. What is interesting in Belarus is that they are strong in some very old-fashioned industries, but not only that, as I mentioned they have this very internationally competitive IT. Also, if you look at employment, their food processing industry is not very hi-tech, but it creates a lot of employment.

“I was invited to Kazakhstan, but at the moment I also have a job from the European Union that needs finishing. The European Union has a program called ‘smart specialization,’ and the research for this is based in Seville in Spain. I think the concept of smart specialization is theoretically important because it indicates that there is also something we might call ‘stupid specialization,’ right? If Ukraine sells its wheat to Italy and imports it back as spaghetti at a value that is hundred times more per kilo, this is an example of a not very smart specialization. So, it opens for a different view on trade – in fact it undermines the whole idea of comparative advantage in international trade – and I think this is a very brave move by the European Union.

“I shall be using three examples of ‘smart specialization’ from Ukraine: the successful cases of sunflower oil, the ban on export of timber logs, and the successful export duty on scrap metal.

“It is interesting to think about the great success of English industrialization: it started with an export duty on raw wool, just like your cases of timber and scrap metal. These are indeed cases of ‘don’t do as the English tell you to do, do as the English did.’”

Professor, over the past four years, Ukraine has implemented a series of reforms aimed at improving the business climate. But we still have not become a second Israel in terms of foreign investors’ interest. What do you think, why is this so?

“Well, Israel is hardly a typical economy, it is a very special story.”

This is to immediately set aside the claim “Yours is a country in the war,” which some people use to explain the dearth of investment.

“I came across a report on the first years of the growth of the Israeli economy, and it was completely dependent on large international transfers. The country was of course set up in order to help survivors from the Holocaust. It was a nation being helped and subsidized internationally, but – most importantly – it attracted a lot of very skilled people, and also capitalists with the right skills. Successful policies that attract skilled immigrants go all the way back to England in the 1500s!

“But if we look at Israel from a right-left political angle, the country also has ‘socialist’ ideas, like the kibbutzim, the agrarian cooperatives. So, Israel was not a purely capitalist market economy. David Ben-Gurion, who was the first prime minister, actually translated a book about socialism by German economist Werner Sombart into Hebrew.

“So, Israel inside is not fully capitalist. As with Belarus, mixed models appear to have been successful. And agrarian cooperatives may be a good way of organizing the agricultural sector also in Ukraine, as it has been in many European countries.”

“THE SITUATION UKRAINE IS IN MAKES ME THINK OF THE TERM UNFAIR TREATIES”

“The situation Ukraine is in makes me think of the term unfair treaties. The idea of unfair treaties is very strong both in Chinese and Japanese history, these are treaties that countries signed, but should not have signed.

“The economic opening of Japan took place in 1853-54, when US admiral Perry came to Japan and essentially said: ‘I want you to sign a treaty of free trade, I will come back in a year, and if you haven’t signed, I will bomb the city.’ So, when he came back the Japanese signed the treaty they should not have signed. At the time, the United States at home was very protective of their industry, but they demanded free trade with Japan.

“China had a very similar experience with what they call their ‘unequal treaties,’ the Europeans forced them to open up to outside trade and they suffered much.

“The Japanese and the Chinese lost what was then called their ‘tariff autonomy,’ they could not decide on their own trade policy. This is what has essentially happened also in Ukraine: you signed an agreement with the European Union that you should probably never have signed. Ukrainian politicians tell me that hardly anyone read what you signed.

“Nobody told you that while you signed away your ‘tariff autonomy’ – which poor countries need much more than rich countries – the EU still has important tariffs and regulation, you feel that yourselves with the small agricultural quotas you get.

“Too many people are focusing on superficial ideologies, too few are interested in reality. This is partly a result of the very abstract way modern economics is taught.

“Ukraine had a strategy A, which was ‘we’ll do like the West tells us to do, and we’ll be OK.’ Right? That was plan A, and plan A hasn’t worked. So, now the country has to go to a plan B, and plan B must be to learn smart things that other countries do. Now you need a plan B, which should ideally be a national consensus.

“If you try to work towards a national consensus, in my view the Ukraine should go back to West and say: ‘Hey, it is not in your own interests that Ukraine is so poor, if you want that we are your buffer against Russia you cannot strangle us with a trade agreement which keeps Ukrainian pensions at less than half of Russian pensions. You, West, without understanding it, are making us so poor that we cannot defend ourselves.’

“For fear of communism, the West established the Marshall Plan in 1947 in order to re-industrialize Europe under initial tariff protection. This plan was extremely successful in creating a belt of rich countries surrounding communism.

“The best way to stop communism, the best way to stop Russian interference, is to make its neighbors rich. Therefore, what’s happening – the economic weakening of Ukraine – is definitely not in the interests of the West.”

“THE BEST WAY TO STOP RUSSIAN INTERFERENCE, IS TO MAKE ITS NEIGHBORS RICH”

Do you think European governments do not understand this?

“No, not at all. I mean, you did everything they asked for, in terms of the nuclear arsenal, etc., you have been behaving very well, but unfortunately, where are you today?

“I feel the US and Europe’s embassies in Ukraine should be forced to face the failure of their policies towards Ukraine. To a large extent what is happening now is blaming the victim.”

“ANOTHER WORRYING PARALLEL TO THE 1930s IS THAT MANY COUNTRIES HAVE A GROWING DEBT”

We are now in such a disadvantageously weak position that we have to put up with all of this. Recently, I met a Ukrainian legislator. We talked about huge credit-funded contracts that Ukraine had signed with one of the world’s major producers, while we have a plant that could also fulfill this order, but it is idle now, so people have no jobs, receive no wages, etc. And I heard a frank answer, probably for the first time: “This is our geopolitical protection money, we have to pay.”

“Yes, that was a big mistake. Another agreement you should not have signed. You are creating trade deficits.

“Another worrying parallel to the 1930s is that many countries have a growing debt. Your debt is approaching 90 percent of GDP. One of the issues that brought the Nazi regime into power in Germany at the time was what was called Zinsknechtschaft, or debt serfdom. Like in a feudal society, the Germans were brought into serfdom by the interests and the debt they had to pay back.”

For European countries, the Russian market is more interesting than the Ukrainian one, because it is bigger and richer, and they also have a lot of energy resources that Europe needs. Can it be that Ukraine has become hostage to these interests?

“One of the advantages of Ukraine is that you have a big market. In Latvia, with less than two million people, 18 percent of the population has left the country as it de-industrialized.

“And if the same percentage of Ukraine’s population should decide to leave, this would mean around eight million people. So, it’s not in the interest of the European Union to have eight million refugees. And I think your message to the West should be: ‘Hey, help us create jobs here, if you do not want to have eight million refugees!’”

We have our Polish neighbor which will gladly admit these eight million. Are they specifically changing their migration policy to suit Ukrainian workers?

“There is an interesting story of chain migration here that may be of interest for you. In Norway, we have Polish workers who work for much less than our workers. When I was in western Ukraine last year, I heard stories that, especially in summertime, a large number of your construction workers are in Poland. And last fall I was in Moldova, and in Moldova I got the continuation of the story, they say ‘our construction workers go to Ukraine.’ So you have a cascade, which starts with lowering wages in Norway, goes through Poland and Ukraine to Moldova.

“This is academically interesting, but socially very sad story of technological primitivization. This is the opposite of economic development, it is economic retrogression!

“During the Marshall Plan, the main argument was that if we do not help Germany, communists will take over.”

Do you plan to visit the Gaydar Economic Forum in St. Petersburg?

“No. I have not been there since 2015. But my book Spontaneous Chaos was translated into Russian last year. To my surprise they invited Jeffrey Sachs and people who were responsible for the shock therapy that caused deindustrialization in Russia. To me it unfortunately looks like they are suffering from the Stockholm syndrome.”

The world is changing very rapidly nowadays. Last year, the Club of Rome, which turned 50 on April 8, issued a report entitled “Come On.” It is fantastic thing from the perspective of economic philosophy. What do you think, what are Ukraine’s chances in the new global agenda?

“You know that story about the French Revolution, when queen Marie Antoinette learned that people did not have bread, she asked ‘Why don’t they eat cake?’ I don’t think she said that, but it’s such a good story.

“How do you in Ukraine get your message across to the wealthy world? That yes, we are interested in trade, yes, we understand the problems of ecology, but on the other hand you have to understand that pensions in Ukraine are so low that old people do not get enough proteins, even if they use their whole pension for food. I think you can demand from your partners that they attempt to understand your problems.

“I was invited in February to Lviv, and there were people there from many former Soviet republics, and found out that the nutrition of old people worried young Ukrainians.

“There is that tremendous contradiction between having a well-educated and partly hi-tech economy and some people not having enough to eat.”

By Alla DUBROVYK-ROKHOVA, The Day

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