“They want to keep Ukrainians down on the farm”The author of the bestseller How Rich Countries Got Rich and Why Poor Countries Stay Poor responded to criticism coming from Ukrainian libertarians
The Ukrainian government is celebrating a victory. On March 14, the Ukrainian Parliament finally ratified a free trade agreement with Canada. The media coverage of the event presents it as a great victory for Ukrainian diplomacy and the Ministry of Economy. However, what you will read now in Erik Reinert’s exclusive interview with The Day might slightly decrease the degree of your enthusiasm. Then, this victory will perhaps seem to you less “victorious.”
Past fall, this Norwegian economist and author of historical and philosophical study How Rich Countries Got Rich and Why Poor Countries Stay Poor gave another interview to The Day (No.61, October 20, 2016), which caused an information explosion of sorts in the Ukrainian segments of social networks, as it was reposted from The Day’s website on almost 5,000 occasions and received around 10,000 likes. However, the most valuable thing that we managed to awake with that contribution was public discussion. To quote a saying liked by our editor-in-chief, “small minds discuss people, while great minds discuss ideas.” Our readers discuss ideas.
The Day hosted a roundtable to discuss Reinert’s work, to which we invited both supporters and opponents of Reinert’s advice and ideas. Unfortunately, only the former came. The rest opted to discuss Reinert himself on social networks. They write that he is not really “a leading international economist” (seemingly because his name sits in the middle of the global list of Top 400 researchers in this field, rather than in the Top 10) and claim that his book is read only in “backward countries” of the post-Soviet space, Latin America, Africa, and China (well, it is probably because his advice is of more interest to residents of poor countries, because they are concerned about getting their countries to join the rich club, after all). Another interesting argument is that Reinert is a charlatan and gives bad advice to forego fighting corruption, abandon free trade with the EU, and refuse IMF loan tranches, because he is paid to do so by his paymasters. However, his detractors neither name these paymasters nor explain what do they stand to gain from Reinert’s advice, why these ideas are bad, and why refusing IMF tranches is a harmful idea, even though former prime minister of Lithuania Andrius Kubilius admitted in an interview with The Day that the first thing he did to get the country out of the economic crisis was to refuse IMF assistance, because he saw the Fund’s experts’ requirements as unacceptable and harmful for Lithuania, and he succeeded.
After all, the most valuable thing in Reinert’s book, and also in this interview just like in the previous one, is, in our opinion, his offer of living practice and historical experience rather than dogmatic theories (“All politicians, be they communists, socialists, democrats, take the same steps in a certain historical period of their country’s development, because they are vital,” Reinert said at the Kyiv Economic Forum on October 10, 2016). Reinert shows that each country’s success in getting wealthy hinges on how well it has chosen “job” (specialization) for itself, and how well it has learned to emulate the best practices of successful countries instead of listening to their advice.
“I STILL NOTICE UKRAINIANS HAVING ISSUES WITH UNDERSTANDING PRIORITIES”
Professor, this is our third interview and your third visit to Ukraine. You recently had a meeting in the parliament, what can you say about your audience there? Did you notice any changes? Are Ukrainian politicians understanding and willing to support your advice?
“I am noticing changes. It is not only Ukraine that is changing. The whole world is changing, as are people’s views of the things that once seemed to be parts of the dogma.
“People are interested in me in Ukraine. I met with your legislators two years ago and now. Interestingly, while the first meeting was attended by a maximum of 20 people, this time, a huge hall was packed with people. This means that libertarians are losing their magic influence with your government (laughs). People are not so readily accepting anymore the idea that the state should be a silent witness to the changes which the society is experiencing.
“However, I still notice Ukrainians having issues with understanding priorities. The fight against corruption cannot be a key issue on the nation’s agenda. This reminds me, and I said it yesterday, of when president Fujimori in Peru came to power with a big agenda, and he went to Washington, and came back from Washington, and the only thing people were saying was, ‘we get rid of the guerrillas, and we get rid of inflation, and then the market will solve all our problems.’ I have a feeling that this story is repeating in Ukraine, ‘if we only get rid of corruption, then everything else will solve itself.’
“The Germans have an expression which is ‘Gelegenheit macht den Dieb’ – ‘the opportunity makes the thief.’ I have been working in more than 60 countries, I have this pretty wide experience. But when I was young, at 24, I was running a business in Italy, and Italy changed from a system of sales tax to system of value-added tax (VAT), it was 1972. And I remember the first years that were relatively chaotic, because it was easy to make a fake invoice, and through a fake invoice, you get money back from the government. As a businessman, since I was exporting my goods from Italy, I was supposed to get money back from the government, but it took three years to get the money, and now I understand why.
“So, if we say it is the opportunity that makes the thief, then perhaps we should rid of the opportunities, and VAT seems to be an opportunity. So perhaps you should go back to the sales tax.”
“UKRAINE HAS A SPECIAL BRAND OF LIBERTARIANISM, WHICH HATES THE STATE AND BUSINESS ALIKE”
So are you, as someone who has helped to treat more than one economy, sure you cannot name any country where the fight against corruption had a therapeutic effect after all?
“It is necessary to work on creating opportunities for people to earn living honestly. Then they will not resort to illegal methods. Well, of course, you also need to eliminate opportunities for theft for those who cannot or do not want to work honestly.”
When our previous interview was published, it caused a wave of outrage among the supporters of liberal economic theory. In particular, we were accused of promoting communist ideas...
“That is also my feeling that Ukraine is dominated by not only neo-liberals but libertarians. I had an interview with two young persons in the fall, and they belonged to that special Ukrainian brand of libertarians. While in the US libertarians hate the state and love business, here in Ukraine you have that special kind when people also hate business. And I was thinking it was probably left over from the communist times, when profit made in a business was very bad. And that made me think of Ayn Rand, who founded the libertarian movement. They are like anarchists.”
“THE U.S. LOST ITS STATUS AS THE HEGEMON IN 2016”
Let us go back to that point for which we were torn to pieces by our critics. When you say that liberalism is dead, because more and more people are beginning to understand that the free market is inefficient: it makes the rich richer and the poor poorer, do you mean just the nations’ foreign trade policies, or domestic market regulation approaches too? Is the free market an absolute evil in your opinion, or does it have a role to play in the domestic market after all?
“Free trade among nations at a similar level of development is always good. Let us say, it is like a boxing match: if you have a heavyweight fighting a lightweight, you know what will happen. As long as people are boxing in the same class, it is fair. And it is also applies to trade. So perhaps, Ukraine should box in the class of Georgia, Belarus, Armenia...
“And free trade is always in the interest of hegemon, of the country with the most advanced economy. Until around 1903, England was the champion of free trade. Then Germany and the US became richer than England, and England changed their ideology and diminished free trade. They wanted free trade with their colonies, and not with everyone.
“In 2016, the US changed, because they are no longer the hegemon. And who is now in favor of free trade, who goes now to Davos and talks about the benefits of free trade? China.
“I think Donald Trump is in many ways a disaster for the US. People who voted for him are going to be very disappointed. But I think Donald Trump is a big opportunity for Ukraine.
“So what should we say to the people who criticize your questions and my answers? We should say to them: ‘Look. The system you are recommending does not even work for the US, it does not even work for England. How could it work here in the periphery, for Ukraine?’”
Why did you call Trump a disaster for the US? Do you predict an economic collapse in America?
“The big problem of the US has been the falling wages for the working class. And in 1993, Bill Clinton’s labor secretary Robert Reich tried to introduce a minimum wage in the US. But he failed – 99 percent of all economists said: ‘No, leave it to the market.’ And the markets, helped by cheap Mexican labor, led to American wages’ fall. If we try to explain why this happened, the main reason was that the labor unions lost their power.
“And there is no sign that Donald Trump or his allies are going to improve that. They are rolling back environmental regulations, they are allowing the coal industry to pollute, and it is a disaster for nature, and also a big problem in terms of health. Just yesterday, Trump said: ‘Oh, healthcare is very complicated.’ And Bernie Sanders comes: ‘Well, how did you discover that?’ Trump was elected on the basis of getting rid of Obamacare, but he did not have a clue what he was going to put instead.
“Still, repeating myself, Trump is an opportunity for Ukraine.”
“YOU SHOULD NOT LET THE CHINESE BUY LAND”
Because he is an opponent of free trade? Do you want to say that it alone is so useful for us that it can compensate for the loss of a strong geopolitical partner? After all, you yourself said that during Trump’s presidency, the US, and in particular their role in the world’s great game, would weaken. In addition to it, China is already taking the front stage. So, by your logic, should we be now actively negotiating with China in order to obtain investment, technology, market access? You have never worked in China, but your book How Rich Countries Got Rich and Why Poor Countries Stay Poor is quite popular there. What can you say about the economy and culture of doing business in China? In what way, in your opinion, Ukraine and China can be helpful to each other?
“I think it is a good idea in business, it is a good idea to play big companies against each other, right? If you want a good deal, you talk to big three or four companies, and you get to make the best deal. So, therefore, I think it is also good to talk to all partners about investment.
“The experience I had with Chinese investment is mostly in Africa, and the most interesting experience was in Eritrea. In Eritrea, the Chinese have built a huge cement plant, good German technology, but whole plant was Chinese. When I visit a country, I like to see companies. I went to see the cement factory, and in the cement factory, there was a big control room, and it was full of people, half of them were Chinese, and half of them were Eritreans. When I was coming to the room, I noticed that all the Chinese were leaving. So I understood that the Chinese were trying to get the message across that they were not running the place.
“Eritrea is a very small country… Well, it is not really that small, but you know, it is not densely populated, and its elite is small. I ended up at a government meeting. There was one person there who was kind of ideological leader, I had just two of us talking, and I asked him how easy it was to deal with the Chinese. And he said: ‘You have to be very clear on what you want and what you do not want, and the Chinese will stick to that agreement.’
“Later I met the Chinese ambassador, and said ‘you know, Eritrea is a small country, so I met all two Chinese businesses there, the cement factory and the shoe factory.’ You know, shoes are manmade, but they had an old machine from China gluing the soles of the shoes to the shoes. And there was one Chinese running that machine in shifts, he worked in Eritrea for three months, and then he was back, and there was another Chinese. But to my great surprise, the Chinese ambassador did not know about that.
“You must not be as naive with China as you are with the EU. I mean, I am getting a bit rough, but I think your approach to the EU has been naive. And they have exploited your naivete. So, be businesslike with the Chinese. Do not be naive.
“The other thing, and another lesson, is that China is not so centralized as we think. There are many different enterprises in China, there are state enterprises, there are private enterprises, there are municipally-owned enterprises. So, China is not this colossus as Russia is. My Chinese friends would say that the Cultural Revolution broke down this very massive, mastodontic colossus.
“Finally, you should not let the Chinese buy land. While in parliament yesterday, I described it as the Easter Island syndrome. Some time around 1868, an English company bought the whole island, and they decided this was the perfect place to raise sheep to sell meat back to England. What happened was they locked the inhabitants back to the village, and they took over control of the land of the natives, so the natives could not make do. Their only way to make a living was to steal sheep from the English. This is one thing I am afraid of in Ukraine.
“There is especially one academic in the US, Timothy A. Wise, who is doing research on land grabs. For instance, South Korea has bought up a lot of land in Africa, half of Madagascar. What we are risking is that people living in Madagascar will not have money to buy their own food.”
“THE STATE SHOULD BE THE ENTREPRENEUR OF LAST RESORT”
“Locking them back to the village” is, in my opinion, also a good description of advice to become an agricultural superpower, which we keep receiving from some Western experts, representing both the EU and the US. You, on the contrary, claim that Ukraine should step up industrial investment by opening factories and develop technologies. However, who is this message of yours targeting? Who should build these production facilities? Should it be the state? Should they be state-owned enterprises? Or are you targeting super-rich Ukrainians, the oligarchs, who spent past 25 years earning most of their fortunes by relying precisely on raw materials or semi-finished products?
“I think the state is very useful, but you do not want the state to raise your children. The state is bad at raising children. So, my experience is that the state should be the entrepreneur of last resort. If nobody else can set up this or that industry, if it is too big for private money, let the state come in, but only if there is not enough private money.
“My country Norway, when we industrialized in the 19th century, we were going to build railways. We said: ‘Ideally, we should have private interests doing this, but since we do not have enough capitalists, somebody has to do it, and that somebody is the state.’”
“AFTER INDUSTRIALISM, YOU HAVE POST-INDUSTRIAL FEUDALISM”
Still, do not you concede that this strategy is a bit outdated for the modern world? Today, when humanity has entered the so-called post-digital era, when modern economies are increasingly frequently described by the term Industrial Revolution 4.0, when service industries are steadily increasing their weight, while that of goods industries decreases, maybe Ukraine should stop trying to catch a train that has long since left, and take the arriving one? After all, we are very well supplied with the primary resource for that kind of businesses, I mean brains. You yourself said at a meeting in the Ukrainian Parliament that so far, the highest quality product to be exported by Ukraine was trained personnel, the human resource. Meanwhile, to get production running, we need infrastructure, including roads, communications, technology, and it costs hundreds of billions of dollars, while we are at war...
“First of all, an industrialized country used to be the same as a rich country. There were no rich countries that were not industrialized.
“This is something called Petty’s Law. William Petty was an English economist of the 17th century. And he said that first you have agriculture which is very big, and then it gets more efficient, then agriculture shrinks and the manufacturing industry grows. So I am open to the idea that what follows after industrialism is what I call ‘post-industrial feudalism.’ Manufacturing is shrinking, labor unions are gone, and what is being born is a neo-feudal society.
“And we see that in Romania. I have a Romanian colleague and he says that people who do not have a job and do not have housing, there are rich people buying up houses, and they say: ‘You can live in this house for free, but if I need somebody to work, you work for me for free.’”
“UKRAINE IS SO POOR THAT YOU HAVE A LOT OF MANUFACTURING CONSUMPTION AHEAD OF YOU”
However, we cannot stop the rolling stones either. Anyway, modern plants and factories are designed to be highly robotized. Futurologists say it will increase even more. Therefore, the construction of such plants as you advise will not solve one of the main pressing issues for Ukraine, I mean providing decently-paid employment to its population. Ukraine has 46 million residents, give or take a few. What structure of the economy do you believe to be the best for us, so that we might become a wealthy country with wealthy citizens?
“Ukrainian situation is positive in the sense that the country is so poor that you have a lot of manufacturing consumption ahead of you, because people will need ironing, things for the house, they will need cars, they will need furniture, they will need a lot of things. So in a sense, being backward is an advantage, because you have to go through the kind of experience that Western Europe went through in the 1960s. That is, growth of objects, of things.”
Nonetheless, we have been struggling at the bottom of the economic pit so far, and cannot find a starting point for growth. Meanwhile, the ongoing war on our territory does not facilitate this task, but has rather the opposite effect. Furthermore, our allies are not in the best of shape either, as the EU has to deal with Brexit, and the US is reforming itself... The situation seems so complicated that apparently, only some very innovative decisions can offer a way out. Something like that made in Singapore when they opened their stock exchange.
“If somebody is telling you that Singapore and Malaysia are based on services, that is really wrong. That is putting the cart in front of the horse. Singapore was a sleepy tropical port in 1950. And then, there was one man who wished to develop that into a high technology manufacturing sector. Because if you have a high technology manufacturing sector, you also get a financial sector.”
“SQUEEZED BETWEEN INDIA AND THE SILICON VALLEY, UKRAINE IS DOOMED TO LOSE”
But still, did you stumble upon any examples of countries skipping some levels of economic “evolution,” for instance, becoming a post-industrial economy directly from an agricultural one? And can we pull ourselves out of the pit by concentrating efforts on the development, for example, of the IT industry?
“Well, I am afraid this will make you compete with countries that are much more experienced in IT and have the market access. You will be competing with India on the one hand – very clever IT people, very good, and very poor – and the Silicon Valley on the other. So, squeezed between India and their programmers and the Silicon Valley, I think you are doomed to lose.
“But that does not mean that you should not try to build an IT sector. You really should try to build an IT sector, and you have people who work on that, but that is never going to absorb the population. I am not against it, but it is not going to solve your problems. I think it will end up with many of these people actually migrating.
“I was driving from the Carpathians to Kyiv, and you need people for that territory. You have to think of territory that you should defend, and the best way to defend a territory is to have wealthy people living there.”