Reforms for a thriving, not surviving, Ukraine

Reforms for a thriving, not surviving, Ukraine

freedom

freedom

 

Three to four years following the Euromaidan protests and Russia’s incursions in Ukraine, Kiev is progressing slightly fiscally and economically, but the country remains poor and mired in corruption, and another backlash against the Ukrainian political elite is brewing. For Ukraine to significantly progress as a country, this political tide must usher in major economic reforms, rather than just ushering out a corrupt, oligarchic class.

 

Ukraine has made strides in its struggle to break free from Russian control. Since the ouster of the Yanukovych regime in 2014, Kiev has established a clearer western orientation, even as it remains at war with Moscow-backed militants in Ukraine’s east. Kiev has won major financial support from the International Monetary Fund and western governments, while reducing debt and deficits. Socially, Kiev has played up the Ukrainian national identity, with the latest move being the adoption of a controversial language law that requires schools to instruct students primarily in Ukrainian, and not in their native languages, from 5th grade onward.

 

But neither friendship with the West, nor nationalism is going to get it done for Ukraine. If the country is going to be able to defend itself against Russia, it will need to accumulate wealth so that it can build military strength. Likewise, Ukraine needs drastic improvement in its economic standing to give its citizens a sense of opportunity and reverse the country’s major demographic problems.

 

A visit to the Maidan in Kiev, where the 2004 Orange Revolution and the 2014 Euromaidan Revolution took place, reveals a giant billboard stating, “freedom is our religion.” Reality indicates otherwise in Ukraine.

 

Unlike in Russia and in fellow Eastern Slavic neighbor Belarus, there are relatively free elections in Ukraine. While Ukrainians enjoy more freedom than their Eastern Slavic neighbors in choosing who will rule them, they do not receive a whole lot more freedom in return from their rulers. In one critical sphere, Ukrainians arguably receive less freedom than both Russians and Belarusians.

 

Ukraine is currently ranked 166th out of 180 countries worldwide in the Economic Freedom Index produced by the U.S.-based Heritage Foundation. Ukraine actually ranks 42 places lower than Russia and 52 lower than Belarus. Russia and Belarus have “mostly unfree” economies, while Ukraine has a “repressed” economy that actually ranks below the likes of Afghanistan and Sudan.

 

Across the Black Sea, Georgia, which has a similarly troubled relationship with Russia, ranks 13th worldwide in economic freedom. Under the presidency of Mikheil Saakashvili, who is now crusading against corruption in Ukraine, Georgia slashed taxes and regulations, spearheading economic growth. Tbilisi reduced the amount of taxes on the books, as well as tax rates, and simplified the payment system. Georgia also modernized and eased licensing and permit systems for businesses and construction, and Tbilisi reformed its labor code, eliminating many costly regulations and making it easier to hire workers.

 

Georgia’s results were outstanding. The country’s GDP grew by 9.6 percent in 2005, 9.4 percent in 2006 and 12.3 percent in 2007. Between 2005 and 2007, Georgia’s ranking in the Economic Freedom Index shot up from 93rd to 31st.  A decade prior, Georgia was ranked in the 100s of the index.

 

Therein lies a model for economic reform in Ukraine. On taxation, Ukraine does not have as great a tax burden as some countries, but lowering taxes will return money from the wasteful state to productive individuals and businesses. Ukraine’s overall tax burden equals 37.6 percent of total domestic income, according to the Economic Freedom Index. Georgia’s current overall tax burden is 25.3 percent of domestic income.

 

Some regulatory reforms have already eased the burden on businesses in Ukraine. Others are desperately needed. The World Bank ranks Ukraine 20th among 190 countries for ease of starting a business. However, Ukraine ranks 80th overall in the World Bank’s Ease of Doing Business Index.

 

Developing property in Ukraine can come with considerable difficulty. Ukraine ranks 140th in dealing with construction permits. When handling rural property, additional challenges arise.

 

Land reform is critical in Ukraine. Land, particularly fertile land, is one of Ukraine’s greatest assets, yet it is also an underused resource, due largely to excess government.

 

With about 42 million hectares or agricultural land, or about 70 percent of the country’s land mass, Ukraine is supposed to be the breadbasket of Europe. Ukraine has more arable land than any other European country and large amounts of the highly fertile chernozem, or black soil.

 

However, Ukraine has had a moratorium on the sale of agricultural land in place for a decade and a half. The IMF has been demanding that Kiev do away with the moratorium, and Ukrainian lawmakers have been reluctant to do so, possibly fearing a populist revolt. IMF staffers say the moratorium limits the expansion of the Ukrainian agriculture sector and leaves Ukraine’s rural population poor.

 

Last October, a Bloomberg column cited John Shmorhum, the CEO of AgroGeneration, which operates in Ukraine, as saying about 1 in every 6 acres of Ukrainian agricultural land is not being farmed, and of land in production, only about 25 percent is reaching yields on level with those in the developed world. Shmorhum, a Ukrainian-American, previously led DuPont’s operations in Ukraine.

 

In addition to keeping the sales prohibition in place, the Ukrainian state maintains ownership of about 25 percent of agricultural land in the country.

 

Privatization was a major component of the Georgian economic reforms. Kakha Bendukidze, a former Georgian minister who spearheaded Tbilisi’s free market reforms, was once quoted as saying about Georgia, “Everything will be sold, except its conscience and honor.”

 

YuzhmashUkraine, too, needs a major privatization drive. Kiev has numerous underperforming state enterprises in addition to agricultural land. For instance, in the city of Dnipro lies a decaying state-owned aerospace manufacturer that was once a jewel of the Soviet nuclear weapons program. The firm and its factories, known as Yuzhmash, were recently named as a possible source of North Korea’s new rocket engines for nuclear missiles, with part of the reasoning being that Yuzhmash’s employees are in desperate need of cash. While Kiev denies the alleged enabling of Pyongyang’s nuclear ambitions, and the report could amount to mere propaganda, the fact that Ukraine has failing state enterprises is undisputed.

 

Privatization allows individuals and firms to infuse capital and turn inefficient enterprises into productive businesses. Ukraine needs fresh capital and fresh business ideas. Competitive bidding on state assets can provide that, whereas keeping failing state operations going will not, nor will selling off the enterprises to local oligarchs.

 

Another element to Georgia’s economic reforms, or at least one that is closely linked, was Tbilisi’s, and specifically Saakashvili’s crackdown on corruption. Under Saakashvili, Georgia raised salaries for public officials and fired and jailed corrupt ones. Tbilisi’s scores on anti-corruption indices shot up as Georgia’s economic freedom rankings did.

 

Corruption and rule of law, or lack thereof, are major factors in Ukraine’s low economic freedom scores. There is sense in a similar approach in Ukraine to what was done in Georgia. There is also a line of reasoning that shrinking government will reduce corruption, as there will be less money to steal and fewer public resources with which crooked officials can make personal use. Likewise, one could expect that with more wealth from economic reforms will come less desperation. However, eliminating the culture of corruption in Ukraine is likely a long-term project.

 

Some commentators say countries like Ukraine must place immediate focus on ensuring civil liberties and political freedoms. This is debatable. There are countries that offer a high degree of economic freedom that do not protect civil liberties. Singapore, for instance, ranks second worldwide in the Index of Economic Freedom. However, there are plenty of cases of countries that safeguard neither political nor economic liberty. Looking to nearby states like Russia and Turkey, there is a visible risk that an authoritarian leader will at any time snatch someone’s business.

 

Mikheil SaakashviliWho can bring about needed economic reforms in Ukraine? Most countries do not have a Saakashvili. Ukraine, at the moment, has the man himself. However, Saakashvili now carries considerable political baggage and does not even carry a valid Ukrainian passport. President Petro Poroshenko revoked his citizenship over the summer, but Saakashvili stormed backed into the country earlier this month and is now touring Ukraine, campaigning against Poroshenko and trying to unite the opposition.

 

Saakashvili is unlikely to rise to power in Ukraine, and for what it’s worth, has said he is not striving to do so. The former Georgian president has said a new political class, pulling from a younger generation, is needed in Ukraine.

 

Ukrainians are remarkably adept at surviving. Whether it be famine, war, Soviet occupation or contemporary troubles, Ukraine as a nation has displayed an incredible survival instinct over the last century. Now, in order to thrive, Ukraine must find politicians willing and able to shrink government. That is not an easy task. But it is possible.

 

By Josh Friedman

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