Stating the Obvious

The materials compiled from the Harvard Institute for International Development state the obvious: Ukraine, Russia, and similar countries are not evolving anything like a market economy but some kind of post-Soviet dysfunctional hybrid that keeps falling deeper into debt and has absolutely no prospects of getting out of its endemic economic crisis. The reason seems to me fairly obvious: the bureaucrats and officials who were supposed to carry out market reforms had no real idea how a market economy operates, but they did want at all costs to hold onto their jobs. That meant that the country has more state than it can afford: too many bureaucrats trying to do too many things. Since productive economic activity cannot tolerate the demands placed upon it by this leviathan state, it flees into the shadows. The shadow economy really is only the flight of economic agents from tax and regulatory pressure it cannot tolerate. Since all those bureaucrats cannot be paid decently, they virtually all supplement their incomes by means of corruption. You cannot fight corruption as long as the system itself forces people to be corrupt. Until the core problem of the state as such is addressed, there really is not much that can be done about such symptoms of it as mass poverty, the shadow economy, and corruption. Add to this the fact that those in power and those advising them were brought up in an environment isolated from intellectual discourse in the outside world, and this renders most of them incapable of understanding even the most basic things.

One way to understand the old Soviet system is as the state eating everything else in society, meaning inter alia that the economy really ceased to exist as something separate from politics. An enterprise director was — and largely still is — a political official, who had — and still has — the connections to solve his problems with a phone call to the right official. Since the official emphasis was always on output rather than the efficient utilization of resources (and with all prices controlled by the state it did not really matter what anything cost), most of the enterprises inherited from the Soviet period can never be made competitive. They will simply continue to consume resources, pile up debts, and drag the country down even further. The longer they stay open, the more it will cost. The longer they can use their connections to shut down more efficient competitors, the longer labor productivity will remain low, and most people will remain poor.

All this would seem to be fairly elementary, but I often wonder if anybody out there is listening. Ukraine is potentially one of the world’s most successful economies, if only the state would allow the economy to function as it should. So far it does not, and there is no sign whatever that this is going to change. The system as it is simply cannot work, and it will not allow much of anything else to work either.