German Consultants Offer Their Own Prescription for the Ailing Ukrainian Economy

As German consultants believe, reforms cannot be put off any longer because this country has nothing to lose and nowhere else to fall.

If we have a look at the course and results of reforms in all the postsocialist countries, it turns out that the history of reforms can always be divided into two periods: a short period of special policy, as it is called by Polish reformer Leszek Balcerowicz, when a wide open window of opportunity brings in systemic transformation proper, and the period of normal policy, when this window is more or less closed, and reforms are ongoing, i.e., reforms follow systemic transformation.

Ukrainian history also seems to have seen such periods. The first was in October 1994. President Leonid Kuchma, relying on the international financial support, announced the course of market economy transformation. The second began in 1995, when the first “correction” of reforms was proclaimed.

Drawn Out Waiting

No matter how critics assess the Ukrainian transformation, it is quite obvious that now the economy needs to be revitalized as much as it did ten and five years ago. But will the “window of opportunity” open for Ukraine today? There is so far no unequivocal answer.

Obstacles on the road of systemic transformation largely boil down to the problem of legitimizing the past, for a devaluation of legitimacy usually follows a deep systemic crisis. Only in this case is it possible to really hope for condemnation of the past and emergence of a new relationship between conformism and nonconformism in the political structure, i.e., for a fundamental change in favor of nonconformism, when the forces striving to change the status quo prevail over those, in whose interests the preservation of this status is.

Naturally, the window of opportunity may open more than once. It may open twice or even more. However, the pace of reforms is set largely in the past tense. How to assess the past, what problems will be called basic, how and about what will the winners and losers be able to reach an agreement: these are the key issues to be debated if and when the window of opportunity opens again.

“Breakthrough into the Market Economy” — 2

The draft programs of Western consultants became one of the first versions of “radicalized” market reforms in Ukraine. Earlier, The Day presented the viewpoint of experts from Harvard Institute of International Development. Now comes the program drawn up by the German economic consultative group attached to the government of Ukraine.

It should be noted this program provides a very detailed analysis of the causes of the current state of the economy and a sufficiently realistic (with reservations detailed below) plan of resolving many of the problems that have piled up. In particular, the program proceeds from the premise that what Ukraine has is a system opposite to a market one: all market conditions are set in such a way that whoever acts economically and rationally acts contrary to the interests of society as a whole.

Here are the weakest spots in the Ukrainian economy, on which reformers should concentrate their attention in the next 1000 days.

First , the slowed-down restructuring and absence of market relations at the enterprise level, especially, insufficient application of the law on bankruptcy, and the absence of effective control over property. This brings about insufficient competition on international markets.

Secondly , the significant influence of the state on economic activities, especially, the granting of large state subsidies, accompanied by an economic and tax policy whose contradictory nature does not allow productivity to rise. This stands in the way of creating a business atmosphere conducive to the inflow of investments.

Thirdly , the significant level of regulation in the energy and agricultural sectors, which play a key role in the revitalization of the whole economy. As a result, they have become the sectors piling up the greatest losses in Ukraine.

Fourthly , the complete overloading of the state budget and ousting of representatives of the private economy from domestic capital markets. This in turns leads to higher interest rates.

Fifthly , utilization of loan money for consumption, not investment. As a result, the government loses trust and creditworthiness, and faces insolvency. Such insolvency has partially become a reality.

Then the German consultative group points out ten principles, without the realization of which the Ukrainian economy will not be able to recover. Among them, a warning that market forces not be allowed to weaken further. “State intervention should be discontinued, it is necessary to drastically cut state material and technical contributions and governmental instructions about the nature and address of supplies,” the program says. And further, “Conditions for competition should be created in all industries: monopolies should be eliminated or at least made subject to state regulation. Property should be allowed to direct economic activity: ownership rights should be strengthened; it should be made possible to bring market actors to account for their actions. Material liability (application of the bankruptcy law) should be introduced on a broader scale. Law and order should become more integral and consistent. One must build up confidence in the state and wage a consistent struggle against corruption. Reforms should always be accompanied by social measures which will cushion their impact. State insolvency, which threatens in March 2000, must be prevented: this can be done by means of budget stabilization and radical budget reform. Stability of the national currency must be safeguarded: monetary and exchange-rate policies should be adapted to the level of reforms. All efforts should be applied to the process of transformation. They should not act in different directions. This requires a large-scale reform of the system of administration.”

Our weakness lies in the weakness of our optimism.

After familiarizing oneself with all this (see the brief contents), the progressive, thinking reader cannot help being happy and sad simultaneously: “Can ‘this’ really be carried out in Ukraine?” According to the German advisors’ soothsaying, this country will face very hard times unless it does at least “this.”

One more surprise comes, however, from reading the program (and not its summary in this publication) and deals with the persons (the system of power in persons) to whom the program is addressed. As far as we can judge by the previous activities of German consultants, certain “fragments” of the program in question have been dished out on the highest tables of this state for five years on end. But obviously, the presumption of innocence remains an integral part of foreign advice.

According to Russian economist V. Mau, “the strength and weakness of an advisor lies in the limited sphere of his professional knowledge and intellectual experience.” Conversely, a politician makes a decision, proceeding from an incalculably larger set of factors dealing primarily with the specific balance of social forces and interest groups, and the solution of specific (often expedient, alas) political tasks, rather than the considerations of theory and history. Incidentally, it is for this reason, I think, that most of the Ukrainian economists I polled expressed an opinion that neither the German nor the American programs have a chance to be implemented “in their original form,” while a virtually unknown program, now being molded in the Kyiv suburb of Pushcha- Ozerna by a group of official economists, has far more chances to be accepted (but not necessarily implemented).

I was also reminded that the advisors’ recommendations can only be interpreted positively by politicians under two circumstances. First, when the recommendations are banal and obvious. And, secondly, when the proposals are in line with the existing balance of the political and economic forces. Politics is the art of the possible is the principal rule of the behavior of politicians and also directly projects onto his opportunity (or even ability) to accept one piece of advice or another. I am not sure if our politicians need the “opportunity” to get richer than somebody else.