Three reasons why there is no economic miracle in Ukraine

Last week, President Viktor Yanukovych of Ukraine presided over a sitting of the Committee on Economic Reforms (chaired by the head of state) that assessed the past year’s performance by the cabinet members and CEOs of government-run companies responsible for such reforms. Apart from criticism, an action plan for the year 2012 was worked out, including the President’s 2010-14 Economic Reforms Program.

“Our expectations were sincere,” said Yanukovych in an opening address, implying the noble cause of reform. He went on to say that hardly anyone in the audience was satisfied with the results of the reforms thus far. No one in the audience objected and the head of state accepted the silence as consent, saying economic reforms were being slowed down and that there weren’t enough positive implementation trends. He referred to the tax reform as an example. Even though the central budget had received an extra 14 billion hryvnias in 2011, Yanukovych didn’t think this reform was effective, considering that “regional businesses are complaining about the heavy tax burden… In other words, along with a positive aspect [i.e., additional budget receipts. — Author], this question remains open.” According to Yanukovych, there are several factors that keep these reforms in a low gear, including the attempts, on the part of separate Cabinet members, to return to the good old [Soviet] times by having certain MPs submit appropriate bills: “Let me tell you frankly that the ministers who aren’t satisfied with their working conditions should tender their resignations rather than wait for us to help them [out of their posts].” This was a heavy hint about cadre changes to be made shortly.

The president’s assessment of his subordinates’ performance was well to be expected, considering that the pension, customs, tax, and land reforms had caused pitched public debates and met with resistance. No chance of smoothing out the rough edges. Experts believe such economic reforms should be upheld; Ukraine has to adjust to the rest of the world to have a higher living standard, but it is necessary to understand what is holding back these reforms before taking another step.

“Last year was an eventful one as Ukrainian society saw a lot of attempts to make such economic reforms, which is a positive factor,” Oleksandr PASKHAVER, president of the Economic Development Center, told The Day. He went on to say that such initiatives don’t suffice. The value of any reform is measured not by the number of experiments but by their logical end results. The number one problem in implementing these reforms is the lack of public understanding. This misunderstanding causes public resistance. Another reason is that those “upstairs” rely on the bureaucrats who are interested in maintaining the status quo, not in making reforms. Problem number three is the wrong way such tasks are assigned in the first place. Paskhaver believes that the Ukrainian political leadership should find an answer to the question why such grand initiatives don’t work before adopting an economic reform action plan for the year 2012. Next they should busy themselves with the preparatory phase, combating corruption which is rampant in all walks of life in Ukraine. Otherwise there will be no effective reforms in 2012, just resistance: “How can you expect a reform in the sphere of health care, considering that all those in power never use their services? How can you expect a reform in traffic control, in the usage of public transport, considering that those in power use their limos that abide by traffic rules of their own?”

Volodymyr LANOVY, ex-Minister of Economy of Ukraine, president of the Market Reforms Center, believes that such reforms are blocked by political bias, by those in power serving the interest of big capital, by that blind faith in the apparatus, the control and punitive agencies. The only way to strengthen Ukraine’s market competitiveness is by ridding this country of all that apparatus, by curbing the bureaucratic appetite, by easing the tax burden, by developing exports (with quick VAT refunds), and by renewing the monetary reform. He stresses that the important thing is not reformer cadre replacements, for this simply won’t work: “Our current political leadership vividly shows a combination of Soviet bureaucratism and insolent capitalism. Under this system executive replacements are useless. You can replace reformers a dozen times and each replacement will perform the same way. It is necessary to determine the factors that are slowing down the reforms.”

Ihor BURAKOVSKY, director, Institute of Economic Studies and Political Consultations, believes that the current political leadership deserves credit for their reform endeavors, among other things for the president and the Cabinet having dared to cope with a number of issues that were shelved by their predecessors, which brought about problems entangled so much some of the tangles had to be cut rather than resolved. He further believes that 90 percent of the president’s economic reforms program should be regarded as extremely important and necessary initiatives. The remaining 10 percent can be argued, of course, he says, but all this is a matter of tactics. By and large, the stated reforms are absolutely adequate, ones Ukraine really needs, he told The Day but added that good intentions and a good-worded action plan don’t suffice. He admitted that, back in 2011, the incumbent administration’s reforms were in a low gear in many respects, above all because the reformers lacked inspiration in the energy domain which is hanging over Ukraine like a sword of Damocles. Here the problem isn’t only about the absence of progress in the gas relations between Ukraine and Russia; there is also the problem of upgrading the domestic market, especially in terms of tariffs and energy policy. “We have actually lost cooperation with the IMF,” he says, referring to the “cheap” energy supplies the current leadership has promised Ukrainians. He also believes that the administrative reform was slowed down; that in some cases (e.g., Derzhkompidpryiemnytstvo [Ukr. bureaucratic acronym for the State Committee of Ukraine on Regulatory Policy and Entrepreneurship]) such reform endeavors would backfire, with some entities being first liquidated and then revived under a different name. Burakovsky stresses: “The current scope of economic reforms is vast and complicated. This project won’t work without an effective government as an apparatus that will implement these changes for the better.” The overall impression is that those “upstairs” are going through the motions of making reforms. Reforms are still to be made within the newly established central executive authorities while some of the previous ones remain to be liquidated. Burakovsky is sure that the sore spot remains the same: government procurement which is the first and foremost indicator of the budget system.

Burakovsky singles out four reasons behind the slow progress of reforms. First, corruption; second, unwillingness to play the game by the new civilized rules; third, the fact that the stated reforms are too complicated by definition, bringing forth two challenges the current administration will find it difficult to meet: (a) the institutional (technical organization aspects) and (b) the intellectual one (the way people can visualize the pressing problems and ways of solving them). In other words, the current administration is hard put to find solutions to these problems. Fourth, the fact that these reforms are stuck, met with public resistance, simply because those in power ought to have established strategic contact with the people in the first place: “People haven’t been explained why such decisions must be made and how, although this is part of the Program of Economic Reforms.”

Burakovsky believes the current political leadership should make a thorough social audit, including social budget appropriations, with the emphasis on actual rather than stated/promised payments: “Reforms aren’t fine-worded declarations and slogans; they’re part of genuine bookkeeping.” Also, those in power should make an example of implementing such reforms: “Under the circumstances, those ‘upstairs’ should play the game by the rules.” They could if they would, but they can’t because they don’t want to, as evidenced by the choice of dishes on the budget menu. The 2012 budget bill envisages 16.6 billion hryvnias’ worth of apparatus appropriations, compared to 13.3 billion due the social strata subject to budget-financed advantages and benefits.

QUOTATION OF The Day

Serhii TIHIPKO: “I’m not satisfied with the result”

A few minutes before a session of the Economic Reforms Committee, at which the president summed up the year 2011, The Day had an opportunity to speak to Serhii Tihipko, Vice-Prime Minister of Ukraine and Minister for Social Policies. As is known, Ukrainsky tyzhden “awarded” Mr. Tihipko with the prize Antihero 2011 for what the publication called “reform-amateurish activities.” Besides, according to a report of the Cabinet’s Economic Reforms Committee on fulfilling the National Plan, social security reforms were carried out at a zero rate in 2011. The Day also asked the vice-premier about the mood in which he was going to attend the session and about how he would assess his reformatory activities in the just-finished year. “I am going to the Economic Reforms Committee session in a good mood. I belong to the people who favor reforms. The faster and more radically we carry them out, the sooner the populace will feel their positive results. As for what we managed to do, I am not going to give any marks. I will only say I am satisfied with pension reform, but not with the overall result, because we are still to do so much in the social sphere,” Tihipko replied.