“Ukraine today is like Germany after World War Two”Erik Reinert, economist of worldwide fame, on why Ukrainians have become poor, and how to change it
In his book How Rich Countries Got Rich and Why Poor Countries Stay Poor (by the way, it is a global bestseller), economist Erik Reinert shows by reaching for historical examples how wealthy countries have achieved success, and how these same countries now keep in poverty less wealthy countries through the so-called “development aid,” provided by the World Bank, IMF, EU central bank, etc... “The main difference between rich and poor countries is that rich countries have all moved through a stage without free trade. Today’s poor countries are prohibited from repeating this stage,” Reinert maintains. In his view, to understand how Europe and America became prosperous, we need to learn strategy and tactics of those who created this development spurt, not the advice of their forgetful successors... In particular, for Ukraine in its current condition, the professor advises using the experience of post-WWII recovery in Europe. Moreover, he believes that we have to use this image in negotiations with Western partners, because it will allegedly make it easier for them to understand the seriousness of the situation in Ukraine and their historical responsibility for solving this problem.
DEINDUSTRIALIZATION AND DECOMMUNIZATION ARE DIFFERENT CONCEPTS
To use doctor-speak, what is your diagnosis of the Ukrainian economy’s current state, seeing that you are well-placed to make it since you have 60,000 books in your library? After all, treating a patient when the diagnosis is inaccurate, and this is exactly what the Ukrainian government and our external donors are doing now, can even have a lethal outcome...
“I come from business, on the one hand, and, on the other hand, I’m development economist. Ukraine is the 59th country in which I’m working, in one way or another. I like it when you use medical metaphors, because having seen other patients makes it easier to use such and such receipts. What I heard at the forum two days ago, I thought your diagnostics of Ukraine being a third-world country, which was in the title, is very wrong. I guess the intention was to say that we perceive the situation very seriously, and this is true. But Ukraine is a second-world country. When we talk about the First World, which is the West, and the Third World, which are the poor countries, but we tend to forget about the Second World, which was the name of the Soviet Union, the Soviet empire. But the main characteristic of the Second World is that those who destroyed Communism, which I think was a very good idea to destroy Communism, they also destroyed too much of your production structure.
“If I look at Ukraine, and compare it to Russia in the 1990s, both countries lost about 50 percent of their industrial production, both countries lost half of their agricultural production, and both lost about 50 percent of revenue. In a sense, it has been forgotten that both sides of the Cold War, both the West and Communism, they were competing on industrialization. They both wanted to industrialize. So, the opposite of communism is not deindustrialization.
“So, I think this patient, Ukraine, has a lot of skills, very skilled population, very friendly population, modern city, good infrastructure here, but probably not in the rest of the countryside, but this is a country which was once industrialized. And my worry now is that if you continue this deindustrialization, you are going to lose young people, they will go abroad.
Photo by Artem SLIPACHUK, The Day
“Economic structure is extremely important. And modern economic theory doesn’t see this. So, I say we have to go back to the theory of how Western Europe was rebuilt after the World War Two.
“Many people tend to think that the opposite of Communism becomes deindustrialization. The population in the 1990s didn’t grow, because men were drinking themselves to death, women didn’t give birth to children, so you had no increase in population. But now I think if you don’t manage to stop deindustrialization, you’ll have a time of population loss. The most initiative young people will move abroad. So, the main export item will be your own human talent.
“Take for example Latvia, a small country of just more than one million people. They had a policy like yours. And they lost more than 20 percent of their population. So, what really surprised me at the forum, it almost made me fall off my chair, was that the former ministry of economy of Latvia had completely changed the ideology. ‘We have to do something to keep industry. Free market won’t give us the industry, the market will be industrialized.’ So, I asked him, ‘Did you changed your mind completely? You’ve completely changed your philosophy and ideology.’ And he said, ‘Yes, because we lost 20 percent of our population.’ So, my sense of urgency for Ukraine is: do you also want to lose 20 percent of your population before you change your mind?
“We see that neoliberal ideology which is supposed to be pro-business often turns against business. We even see it in the United States. The Export-Import Bank that finances US export is closed now. It’s sabotaging business manufacture. And I think similar things are happening here. Serious businesses have invested in Ukraine and you seem to sabotage them. The government seems to sabotage them in the same way that the Tea Party of the United States sabotaged the Export-Import Bank.”
To stop the decline, Ukraine needs money, that is, cheap loans, or even better, investment. You advised us past year that to get it, we needed to convince Europe that “Kyiv today is like Berlin after World War Two,” because it would make it easier for them to understand the importance of financial support for Ukrainians. A year has passed, and we see that the EU still does not understand peculiarities of Ukrainian situation, or perhaps does not want to understand them... After all, compared to the amounts that the German state poured into Greece, the European aid for Ukraine is just pennies. Or, maybe, the EU (Germany and France) are actually opposing Ukraine’s success? What do you think?
“I have to say that I’m not an expert on Ukraine. What seems to me, you’re getting money only to repay your debts. So, somebody is curing your symptoms. You need more money to solve the problems.”
Where to find them, then?
“I recommend that you start looking at what made Brazil successful. I think in your situation you have to devalue. You have to go through inflation. But Brazil did phenomenally well with inflation. So, it is possible. Inflation is bad, but you can grow by inflation. Brazil’s growth was also there. Also a big issue in Brazil was the cost of money. I can see this in the stores here. The money is very expensive. When it’s about giving credit at a lower rate to investors. If you want to buy a yacht, you pay a very high interest rate. If you want to build a new industry, you pay lower. Now it’s probably the other way round, because if you buy a yacht, you’re a rich person, and you pay no interest rate. So, the market has reverse incentives. What you need to do is to give lower interest rates to the people who innovate and start the businesses.”
IMPROVING EDUCATION SHOULD BE YOUR LONG-TERM STRATEGY
Your advice is for a situation in which the officials who determine the national policy and the people have the same goals by default. What if they do not, though? What if the people in power pursue their own monetary interests while their constituents expect something else of them? The low level of political literacy, inherited from the Soviet past, is the reason why people are still unable to properly use elections, the only effective instrument of influencing power in a democracy, so they still bite the baits offered by political consultants every time... Can such people build a country you call middle-developed on their own, without political elite? If yes, how can they do it?
“Democracy should change this. But I agree with you that democracy in Ukraine is immature. You know, the second American president, Adams, said that democracy depends on educated people. That’s the long term. In the short term look at the people who won the Nobel Peace Prize this year. They were from four organizations we’ve never heard about, in Tunisia: the Industrial Confederation, the Labor Union, the Order of Lawyers, and the Human Rights League. Their country had a complicated situation, so they united to improve it. I think that’s a model of how civil society gets together and creates institutions.”
Does this model work in the international financial market? Can institutions of this sort approach donors, get assistance, loans, investments?
“No, but someone said at the forum that because of your wages you can compete with the Chinese. You cannot compete with China. Their wages are lower, the technologies are much better, the market is so much better. They have been protecting their industry since 1949. And they’ve opened up very gradually to the market.
“So, if you took the economic development in Ukraine and China, you would see that they were both developing, but when you come to 1989, China flattens out. It doesn’t grow, but it doesn’t shrink, and then it starts growing. Ukraine collapsed. In Norway we say we shouldn’t talk about the snow of last year. But in this case it’s useful. If you want to see the doctor, you want to see the medical case. The conditions were not very healthy. And somebody with the same disease, Communism, survived. China with the same disease did very well, Ukraine with the same Communist disease did not. The key thing is the timing of the opening of the world market.”
Did Ukraine make a mistake with that moment?
“Yes, timing is the key. If you are going to make a mistake, open it bit later rather than earlier.”
As of today, we are very open as it is. Ukraine is member of the WTO, we have signed the Free Trade Zone agreement with the EU. How can we protect our industry under the circumstances, and develop manufacturing?
“Yes, that’s the question. I was saying in Russia a few years ago that Russians make a mistake if they think that belonging to a club of the rich will make you rich. That doesn’t make you rich. Belonging to the WTO, if we say that it’s a club of the rich, the club membership doesn’t make you rich. That’s what I’m afraid of here too.
“When I try to look at the treaties with Ukraine at the European Union website, I find those saying that if the exports from Ukraine hurt any economic interest in the EU, they can stop the import. What I read is if you are successful they will stop you. As long as you are unsuccessful you can have all the free trade you want.
“This is, in my view, a very unequal treaty. It’s the kind of treaty that the Americans forced to sign with the Japanese and Chinese two hundred and fifty years ago. I cannot guarantee that I’ve read everything.”
How efficient do you think are the sanctions applied nowadays by the West against the Kremlin? Are they really detrimental to Russian economy and will thus force the Kremlin to lay down arms? Or conversely, do they help strengthen it, in the long-term perspective, and switch from the raw material model to a more technological one?
“Very interesting question. In many places industrialization has been born from boycott.
“American industrialization started to grow after Napoleonic War Blockade. The blockade reduced the American imports by three-quarters, then American manufactures started to grow. Same thing in South Africa and Rhodesia. Now it’s Zimbabwe.
“I think the West has learned from that, because I’ve noticed that their boycott of Russia was financial. The EU still wanted to flood Russia with their agricultural products. Russians imposed a trade blockade on themselves.
“If we go back to the snow of last year, what killed the industry in Ukraine and Russia was a complete overvaluation of currency, the currency was far too hard. And then, I believe it was the same year in Ukraine, in August 1998, the value of the currency fell dramatically. So, if you saved money to buy a car, as a result you could buy only a bicycle for the same money.
“From that point of view, the value of your currency is going down. It’s good. If you just manage to give not too expensive credits to the companies which want to take over, you should use devaluation. You shouldn’t worry about people who have money in the bank – they will say, ‘How terrible!’ You should worry about people who won’t have money to start companies.
“Italy is an example. Italy in the 1970s and 1980s had very high inflation. During that period I lived in Italy and I started a manufacturing company. The purchasing power of people was the same. The interest rate was minus five percent. As an industrialist, I saw that the capital was very cheap, the labor was expensive. Like everyone else, we invested in machines, because machines are so cheap. In the 1970s and 1980s the real wages grew more than in Germany.
“Mario Draghi, the president of the European Central Bank, he had money in the bank, so to him inflation was terrible, because he lost money. But for me as an industrialist it was great, because I was buying machines cheap. And I had no interest rate.
“The cost of the capital is important. I think once you’re going to run into it. The cost of capital too high, and this is going to be the currency risk, so you don’t want to borrow in euro. So, you need a development bank, like the Brazilian one or the Italian one, especially the Brazilian one, so that you could protect the investment. If you want to buy a yacht, go to the market, if you want to buy a Mercedes, go to the market, they don’t care. If you want to build the Mercedes, you should get cheap money.
“But if we talk about Greece, they were given money that it shouldn’t have received. One American bank was cheating the books of Greece, so that the debt seemed less than they had. The only way to solve the Greek problem would be to cancel the debt, but that is not happening. Or they should let Greece out of the Eurozone.”
And admit to the EU’s political collapse?
“But then in Europe when you have problems, you always devalue. If you don’t devalue, you have to move people. Either you move the exchange rate, or you move people. And now the Greeks, who don’t want to go to Germany, go to Germany, where they are not wanted. I wrote a paper with an Estonian colleague in 2006 and it was called ‘European Eastern Enlargement as Europe’s Attempted Economic Suicide?’ Now I wouldn’t put a question mark there.”
Coming back to the question about Russia and its war in Ukraine. If the sanctions are not an efficient deterrence tool, what other economic levers could the First World apply against the Kremlin, if any?
“I drew parallel with 1930. Germany had been made very poor, because of the debts it had to pay. And economist John Keynes warned in a peace treaty after the World War One if we treat Germany like this, we will get a war within one generation. Hitler’s aggression could grow on the discontent of the very poor people. I don’t know how far to go to draw the parallel with Putin’s popularity and his expansionism, they grow on the discontent of the people. But I think making Russia poorer will not decrease the aggression.
“But the aggression must be stopped. They must respect the territorial integrity of Ukraine. I see a kind of colonialism which comes from the time of Catherine II, when the Ukrainian was prohibited from being taught in schools, in 1763. The interesting period when Jesuits were driven out of China, they tried to help the Indians in South America, but were driven out too. In Norway we prohibited our minorities from speaking their language. And you had same thing happening in the 1920s.
“So I think you have a legitimate post-colonial situation and you need some healthy nationalism. And healthy nationalism is ‘let’s build this country,’ vile nationalism is ‘let’s invade the neighbors.’ What I’m afraid of is that the neoliberal policies stand in the way of this healthy nationalism, because they only think of the market. They are anti-business and anti-nationalistic anyway. So, I think what this country needs is a vision, where we want to be. Neoliberals don’t have a vision, they just want to go where the wind blows. They don’t want to sail a boat.”
Our editor-in-chief likes to say that we must find firm footing in our historical platform, Kyivan Rus’.
“This question is very interesting, because four of our most important kings all lived in Kyiv for many years. Old glory can be used in a constructive way. Not just be crying about old times. Say, we’ve been rich before, we can do it again.”
Can we still? Ukrainians, despite all the attempts to present us as a young, 24-year-old nation, are in fact an ancient nation. Unlike Russians who, seen historically, are undergoing a sort of adolescence. What does economic theory say about such a thing as “resource exhaustion,” in particular, exhaustion of human capital?
“You can see that there are different ways of ageing. Like ageing in Venice was normal, when the production stops and all the money goes to real estate, beautiful buildings, and now these buildings are used to attract tourists. You can also age like Amsterdam, because in 1500s Amsterdam was the richest city in Europe. They aged with grace. They kept the manufacturing going. So, it’s a matter of keeping the production going.”