Sometimes political instability is a good thing
Interview with Anders Åslund, senior fellow at the Atlantic Council. Interviewer Adam Reichardt.
ADAM REICHARDT: I would like to start with your assessment of the reform process in Ukraine and how you see its development. It has been two years since the new parliament took over and three years since the start of the EuroMaidan. What are some of the successes which aren’t being talked about enough and what are the setbacks and failures?
ANDERS ÅSLUND: Generally speaking, a big reform process lasts one or two years and then it fades. In this case, the question for Ukraine is – has it been enough. My argument would be that probably enough has been done so far, but it is not yet clear that we are seeing irreversible reforms. What is certain is that this has been the most substantial reform wave we have ever seen in Ukraine over the last 25 years. I can give you a number of points where I think Ukraine has been most successful.
First of all is the unification of the energy process, something that Poland did in 1992. Ukraine has finally done it. Within two years, gas prices for households had increased 11 times. This is massive. Yet, with this reform they have saved eight per cent of GDP in public expenditures. Around three-quarters of that had essentially gone to a few oligarchs who were trading gas at different prices, this has now essentially stopped. The energy savings have been significant. There was a 20 per cent decline in gas consumption last year and it seems to be ten per cent this year; despite the fact that critics had said they would not be effective and that gas metres would be impossible. But the result is the opposite. People want gas meters in order to prove that they do not use so much gas and so they can pay less.
The second major success is the fact that the budget deficit was cut from ten per cent in 2014 to 2.1 per cent last year; a cut of eight per cent. One of the IMF goals was that the deficit reach 5.7 per cent; it became 2.1. In other words, Ukraine has strongly over-performed, mostly thanks to the unification of the gas price one year earlier than the IMF had called for.
The third issue is that thanks to the floating exchange rate, Ukraine has eliminated its current accounts deficit from nine per cent of GDP in 2013 to zero last year. This is a great achievement. The fourth major thing is the introduction of the ProZorro public electronic procurement system, which is open and competitive. It is supposed to be comprehensive from the first of August.
The fifth issue is the cleaning out of the banking system. Out of 180 banks, 83 have now been closed. The banking system, which was a massive den of corruption under Viktor Yanukovych, has now that has been cleansed and all those people who had given themselves huge loans have lost their banks. On top of that, the real owners of the banks have been revealed.
And what key areas are still lacking?
First and foremost is judiciary reform. This includes the prosecution, the judiciary and everything around it. It has been legislated, the law on prosecution was adopted in September 2015 and the constitutional amendments on judiciary reform were adopted this summer, but I will believe it when I see it. Instead, three new bodies focused on anti-corruption have been set up. At least one of them has been very strong: the National Anti-Corruption Bureau. This office is really going after the big cases. But the judicial system remains a big problem. You cannot have justice in Ukraine as it is now.
Another problem is privatisation, which has not gone anywhere. Ukraine has 3,800 state-owned enterprises of which 1,800 actually work. Most are just ruins, like factory ruins, which should be sold off as real estate. It is important to get them out of state hands as they currently function primarily as a source of corruption. The third major area, that is underway now, is public administration reform and the European Union is closely involved in this. The salaries of public administration are still ridiculously low and people cannot live on those salaries.
The fourth area is to legalize the private sales of agricultural land so that land will get its right value. Thirty per cent of Ukraine’s agricultural enterprises average up to half a million hectares and are too big to manage. What would make sense in Ukraine would be smaller farms, family farms with a few thousand hectares – like American-style farms. The final area is pension reform. Ukraine should undertake pension reform similar to the one that Poland did, which has now been partially destroyed by the [previous] government of Donald Tusk…
When we talk about reforms in Ukraine, we talk about the various specific sectors, like the ones you just mentioned. However, we do not talk much about a full transformation, like we did in the early 1990s in Central Europe. Instead, the buzzword is reform. Is this the right approach?
The most important thing in Ukraine that needs to be addressed is corruption and the Ukrainians are very much aware of this. There are very few people who are arguing for more public expenditures to stimulate the economy. The question is whether you are in favour of corruption or in favour of reform. This is how the discussion goes. And I think this is a very mature discussion.
I would also mention that I have never seen in any post-communist transition country such unity among the western donors. If you take Saakashvili’s Georgia, for example, it was exactly the opposite. There, the EU thought that Saakashvili was rushing, unbalanced and tried to change everything too radically. The Americans, on the other hand, mostly supported him. In Ukraine, the EU and the US share the same view, together with the IMF and the European Bank for Reconstruction and Development, which are the most prominent organisations. The reason here is that Ukraine is enormously open. It is relatively easier to understand what is happening in Ukraine than what is happening in Poland, for example. Not to mention the US or the UK, where you have gag orders and libel whenever you try to say anything that is true. Did you know that the US is ranked 41st in the world when it comes to freedom of the media according to Journalists without Borders? The United Kingdom is ranked 38th, and this is because of such limited transparency. In Ukraine, it is extremely open. Libel does not function and everything is published. Therefore one can know exactly who is stealing and how. This leads to a broad consensus among the sensible people in Ukraine and a consensus from the western supporters. No country that is as corrupt as Ukraine is so open and transparent. This also has an unfortunate effect, since the West is able to see exactly how terribly corrupt this country is. It is more critical about Ukraine than other countries which are much more corrupt like Iraq or Afghanistan. This is because you do not hear the stories in the same way; the situation is worse but not reported.
Who would you describe as the key drivers of the reforms? Who are the most important actors that should be supported, either inside or outside Ukraine?
If you take the people who have done the reforms it is Andriy Kobolyev, the head of Naftogaz and he has a group of people there; Valeriya Hontareva, the head of the national bank who also has a team there. Natalie Jaresko, the former finance minister, and it appears that Oleksandr Danylyuk, the new minister of finance, is following in her footsteps, perhaps not as firmly. We can compare how Grzegorz Kołodko followed Leszek Balcerowicz in Poland. They are trying to say it is a completely different path, but whatever success came was mainly due to the course set by Balcerowicz. It is the same way now with Danylyuk, who is following the reforms, but he is doing it in a much nicer way, in order not to upset people. In fact he is sticking to three per cent GDP budget deficit. Other reformers have included also Aivaras Abromavičius who was minister of economy, [Oleksiy] Pavlenko who was minister of agriculture, [Andriy] Pyvovarsky who was minister of transportation and infrastructure…
But these are names of people who are no longer there…
Yes, but this is typical. If you compare with Poland, Leszek Balcerowicz hung on for about 800 days, which is about two years and that was it. Normally this process lasts for one or two years…
So it is a natural development?
It is natural. And one of the big things that has happened in Ukraine is that there is a whole generation of new people coming in. Very much like what happened in Poland, even the opposite side had to have people who spoke English and were well educated and could defend themselves. Poland has had lots of different ministers of finance and I do not think there is any one of them that I would call incompetent. Ukraine has now got into this thinking that in order to be taken seriously, there has to be competence.
What are the risks for completing these reforms?
The greatest risk is that they do not get the judicial reform done. I do not think that the macro-economic stabilisation is likely to be undone. But you have general irresponsible populist politicians who use various populist ideas like pensions or land ownership and undermine the process. When we had parliamentary elections in October 2015, the good news was that 54 per cent of the parliamentarians were new; the bad news was that 46 per cent were old. It is very much the old who have taken over because they have more skills. They know how to manipulate the system. I would guess that a fair number of the new parliamentarians have been corrupted by the old ways. In particular since they keep salaries so low, MPs need to take envelopes (under the table). A normal parliamentarian gets an envelope with 8000 US dollars a month, to be loyal to his party, in cash. Salaries are only $250 a month. The parliament is now a major source of corruption. Therefore it would be good to have early elections with a new electoral law. While of course for the government it would be very bad to have early elections because then the populists would take over. Nevertheless I am always in favour of government crises and early elections. Poland and the three Baltic states had governments with an average life expectancy of one year during the first decade of the transition. That is why it was so successful. If you ask Leszek Balcerowicz, he’d say it was a serious problem that they didn’t have enough government stability. Normally I agree with him, but on this point I believe that political instability is good. If your main problem is corruption, corruption is something you get from stability not instability.
There are some discussions that someone like Yulia Tymoshenko could gain the most with early elections…
I do not believe this. If there are early elections, I think the main theme would be corruption. And Yulia Tymoshenko does not have a good reputation in this regard. She would be badly hit in such a campaign. There is also a strong sense that a new elite is badly needed. She is very much a part of the old elite; if you belong to the old power, you lose. One should not believe what the opinion polls say when elections are not really coming. I believe things would change when the elections become real.
Anders Åslund is a senior fellow at the Atlantic Council and author of the book Ukraine: What Went Wrong and How to Fix It.
Adam Reichardt is the editor in chief of New Eastern Europe.