“Ukraine lacks a clear notion of where it ought to go”

Ukraine formally announced the start of market reforms in 1994, that year marking the beginning of its official relationships with international financial institutions (IFIs). Less than five years have passed, and all hopes for positive changes have been supplanted by utter disillusionment. Moreover, the World Bank and IMF are now regarded by many as perhaps the main reason for Ukraine’s economic degradation. The Left accuse international financial institutions of imposing their liberal market economy, and the Right criticize Ukraine’s Western well-wishers for supporting a regime which never intended to carry out any such reforms in the first place. This time The Day’s round table hosted Gregory Jedrzejczak, who heads the World Bank’s office in Ukraine. Who does the World Bank actually back in Ukraine? Why do so many loans received by Ukraine turn up on private bank accounts so quickly and so easily? Can this money be returned to Ukraine? How long will it take Ukrainians to start living like the Poles (if not the French)? Mr. Jedrzejczak (of Polish descent) was posed these and many other questions that are of such interest to The Day’s readers.

SEEKING THE REASONS FOR FAILURE IN ONESELF IS VERY DIFFICULT

The Day: Recently we conducted a poll showing the Ukrainian public’s attitude toward international financial aid. Only a small percentage favors the Cabinet’s cooperation with IFIs. How would you explain this? Does it means that foreign aid is ineffective?

G. J.: I can understand people showing varying attitudes toward the IFIs. That’s normal. We are all human. Except perhaps that IFIs have more experience accumulated in other countries. However, I am opposed to the idea that everything being done by IFIs is bad. We are often told that our assistance damages rather than helps Ukraine, that this is genocide, and so on. I am always willing to have a dialogue, but it has to deal with a specific subject. If someone comes and says, “We think that what’s happening in Ukraine now is your doing,” we are prepared to discuss whether things can be done in a different, better way. I also see a psychological aspect there. If something goes wrong in a country the first thing the government does is look for a guilty party. Seeking the cause of failure in oneself is very difficult. It is hard to admit that a country with a population of 50 million, located in the heart of Europe, with such intelligent people and fertile soil ranks among the poorest states in the world.

Suppose, they find this guilty party. It will mean that there is an organization or group of people capable of influencing a large country with a thousand-year-old history and inhabited by 50 million people. I don’t think this is really possible. Also, the press plays an important role here. You should show people what good or bad things are happening in your country and whether this country can do without foreign aid. I mean whether there is an alternative. This is a subject for specific discussion.

The Day: Does world practice know any cases when, after the government went bankrupt, debts to IFIs were referred to private bank accounts? We all see that the public debt is soaring and at the same time even more intricate patterns of appropriating budget funds are being worked out. Isn’t there a way to exact this money from Ukrainian corrupt politicians? We mean the possibility of former Premier Lazarenko making public a list of bank accounts of former and current ranking officials. And these accounts are supposed to include Western loans received under government guarantees.

G. J.: You see, this is not our problem but your government’s. In a sense we feel more comfortable having the Cabinet as our partner. This is not our problem also because the World Bank loans have not fallen due, not yet. Now IMF is a different story. Already this year Ukraine is to start paying back an IMF loan worth some $500 million. I think it’s a very serious problem. There are six or seven countries in the world that haven’t repaid the Fund. The Economist wrote about Russia that only a year ago this country wanted to join G-7. Today it stands a good chance of being added to P-7 (i.e., the IMF deadbeats — Ed.). Ukraine may well find itself in that number, and nobody will consider Lazarenko’s money as collateral.

The Day: The reason we asked you about a way to exact stolen money is that the West is considering the possibility of freezing private Russian bank accounts (in case of default) if and when they can prove that these accounts have budget money.

G. J.: I have no such information, but it makes sense from the legal point of view.

YOUR POLITICAL SYSTEM IS A BERMUDA TRIANGLE FOR ME

The Day: What would you say are the main reasons for the Ukrainian economy being unresponsive to international financial aid?

G. J.: I would suggest regarding the Ukrainian problem from two angles. First, we see real progress in the development of an entirely new country and I mean a big one. In a smaller country everything would be simpler. Ukraine has escaped interethnic hostilities. Second, Ukraine does not have the time it would normally require — between 50 and 100 years — to establish and adjust itself to a new economic and institutional lifestyle. Considering all this, what you have now can hardly be described as satisfactory. I am not blaming anyone for the situation that has developed, but I must admit that Ukraine lacks a clear notion of where it ought to go.

I think the main reason for Ukraine’s failures is the absence of central and local administrative reform. Your political system is a Bermuda Triangle to me. There is Verkhovna Rada, which is in opposition and does not seem to be responsible for anything. If you are constantly in opposition you can easily make irresponsible decisions. The President and his Administration do not have enough vehicles to make decisions and implement them. All they can do is block this and that. The government — I mean the ministries, the whole bureaucratic machine — is in a similar position. A minister may say one thing, then someone somewhere else in the apparatus will say it won’t work, because they don’t have everything required for it, so another decision goes down the drain. Then on top of all these structures you have your colossal bureaucracy.

There are countless other examples of how the government bureaucracy is slowing down progress. Local administrations have an especially negative impact on the economy. It is practically impossible to start a private business in Ukraine. If you don’t go underground, you either get killed or start paying endless bribes. And your tax inspectorates are the key weapon to destroy one’s business rival. Add here your sanitary and fire inspectorates, Standardization Committee (selling the world’s most expensive licenses). Last year, for example, that committee decided that US shampoo was not good enough for the Ukrainian consumer, so local experts had be sent to France and Britain to witness its production and decide whether it was good for Ukraine’s people. What more can I say? How can one expect serious investors to consider risking their money in such a country? How do you expect to attract private capital? Everywhere in the civilized world small and medium businesses constitute between 50 and 70 percent of the economy.

The Day: Can one describe such political course as reformist?

G. J.: I wouldn’t want to use words like reformist or nonreformist. I was also born in a socialist country and they also called black white and vice versa. Of course, it has nothing to do with reform. In terms of annual world competitive ratings, Ukraine is placed somewhere in the lower couple of hundreds. I mean everyone can see the situation for what it really is. On the other hand, international organizations are not such inveterate critics to say that’s it, no more money. But real life is real life. It’s either help Ukraine, even though you don’t do things the way we think proper, or let it struggle with its problems alone. A hard choice to make, because this is not solely an economic issue. But you must realize that there is a limit to the international organizations’ patience. We are often told by people from the political elite, “Look, we have geopolitical importance.” In this sense Ukraine would probably continue receiving some money, just to keep it afloat, but this would be the greatest disaster for it as a polity. In the West people also live on welfare and everybody knows that if you are paid just to survive you will remain poor for the rest of your life.

The Day: There are several key sectors in the Ukrainian economy, including power industry, agriculture, and coal mining. Remarkably, the government helps them remain unprofitable, providing with resources supplied by other sectors. The World Bank has projects concerning each of these key sectors. Would you specify their basic principles and actual progress?

G. J.: I am glad to know that you are aware of their unprofitability. Many in Ukraine think otherwise. Some say that coal mines are the jewel in the crown of the Ukrainian economy. Indeed, we have a project wherety certain mines are to be closed, because they won’t be profitable ever again. Simultaneously, we help provide new jobs for their miners. But we are being strongly resisted. The interests of various groups are involved, people who have never been lower than their basements, but who benefit from miners’ strikes. And the same is true of other sectors where some stage protest actions and others receive subsidies.

YOU HAVE YOURSELVES AGREED TO LIVE WITH CORRUPTION

The Day: Different estimates point to between 40 and 60 percent of the Ukrainian economy being controlled by the rackets: the shadow economy, you know. Does the World Bank have any methods allowing determination how much international financial aid is being consumed by the shadow sector?

G. J.: I don’t want to say that all of that shadow economy is a black or criminal economy. In many cases the shadow economy is begotten by the legislation in force. What you call shadow economy in Ukraine is regarded as perfectly normal, standard practice in other countries. Once I heard a definition of socialism which I liked: socialism is the system best equipped to solve problems that would not exist without socialism. In many respects the shadow economy is artificial and can exist only because there are social conditions for its existence, like working hand in glove with the administration, along with other factors restricting competition. Yes, there are people in the shadow sector who just don’t want to pay taxes. This is bad, of course, but their business performance isn’t bad at all; they give other people jobs and make good products. The third type of the shadow economy is the Mafia economy.

The shadow economy is approached using methods depending on its type. In the first case it is enough to alter the legal framework, to make the shadow economy legitimate. The second type requires changes in the tax system, although there will always be tax evaders, let’s face it. The third type calls for better law enforcement, combating corruption.

The Day: In Ukraine senior state functionaries and Verkhovna Rada deputies, party affiliation notwithstanding, are remarkably unanimous in trying to build this type of semi-legal, semi-criminal economy. Almost everyone in Ukraine knows which of the VIPs has an interest where. The Accounting Chamber reports abuses of office at different bureaucratic levels almost every month. No reaction from the top. Would you agree that market reform should start in Ukraine not so much with the administrative reform as with anticorruption programs?

G. J.: You have just mentioned an extremely important and sophisticated problem. Important because the economic system is not allocating resources in keeping with economic criteria. On the other hand, this system eliminates competition. The social consequences are disastrous. People simply have to put up with the fact that money can be made not by working hard and taking business risks, but because someone has useful contacts somewhere in the government. How can this be changed? Of course, official programs can be introduced, but the main thing is the people’s attitude. Do they accept or object to corruption? You say that practically everyone knows about corruption and nothing changes. What does this mean? Precisely that everybody in some or other way accepts corruption. This situation will change only when one and all will say a resolute no to corruption.