Ultima Thule

In ancient times the northernmost region of the habitable world - hence, any distant, unknown or mysterious land.

Thursday, June 30, 2005

The morning after the revolution -- now comes the hard part

By Aussiegirl

This analysis lays out some interesting details which tally with my own general impressions of how things are progressing in Ukraine in the "post-revolutionary" period. Yushchenko has a very short time to implement "irreversible" and fundamental changes to the economic and political system in Ukraine, before his presidential powers are reduced according to the agreement reached before the last election and before parliamentary elections for the Verkhovna Rada take place in 2006.

Unfortunately, it appears that Yushchenko has been content to become a sort of philosophical father of the revolution and roving diplomatic foreign ambassador of Ukraine, undertaking 12 overseas trips while leaving the day to day running of the government to Yulia Tymoshenko, who has taken to the job rather with a bit too much fervor and is wielding her new-found authority more in the direction of increased state controls rather than in the direction of free-market reforms.

While Yushchenko has reined in Tymoshenko in the recent controversy over the oil crisis, he has allowed her to make some very controversial and changes which do anything but advance the cause of an increased free market -- changes such as revaluing the hryvnia, imposing price controls on meats and other commodities, increasing pensions and salaries at a cost that the government can ill-afford, (which, not coincidentally boosts her popularity).

She has also worried potential foreign and domestic investors by her threats to "re-nationalize" large sectors of the economy which she says were sold off at a loss to cronies of Kuchma and other corrupt officials. This has been a consistent disagreement between her and Yushchenko, as he has repeatedly stated that only about a dozen or so privatizations schemes, including Kryvorozhstal, Ukraine's largest steel-mill, which was sold to Kuchma's son-in-law at a fraction of its true value, would come under scrutiny and be "re-privatized" -- i.e. seized and then re-sold by the goverment to the highest bidder. Tymoshenko, on the other hand, has repeatedly put the number as high as in the hundreds, thereby scaring off investors who once again fear that their businesses will be subject to capricious government schemes.

(Personally, I think it would have been simpler, wiser and less disruptive to simply agree to let the present owners of these enterprises make up the difference between the highest current market bid and the price they paid to acquire the property, which is something they have offered to do. As it is, the case of Kryvorozhstal is turning into a dragged out mess which is not serving anyone's interests because of the prospects of protracted litigation as the owners have appealed Ukraine's actions to the European court.)

It is a mystery why Yushchenko has allowed this state of affairs to continue even though he has repeatedly criticized the changes the Tymoshenko's government has undertaken, like her solution to the oil crisis and the revaluation of the hryvnia. One wonders why he continues to be content making high profile visits all over the world while Ukraine continues to flounder economically and politically.

Following a democratic revolution emotions are bound to be high, expectations are high, idealism is high. Unfortunately, the Yushchenko government appears to be content to coast on its good publicity and optimism generated at home and abroad by the heady afterglow of those dramatic days in the snows of December on the Maidan, but is failing to get down quickly enough to the bare bones reforms which need to be implemented before new changes in the balance of power within the government take place. Ukraine can only count on the good will of foreign governments for a limited time before real and constructive measures need to be seen to be implemented. Foreign investment will soon dry up or will simply not be attracted to a country which still engages in socialist sounding policies.

Ukraine must decide its future. Simply talking about joining the EU isn't enough -- concrete steps must be taken to move Ukraine out of the stagnant command economy mentality and into the free market mentality. Sadly, old habits die hard -- and when the going gets tough it appears to be easier to revert to old ways of simply issuing government edicts and attempting to micromanage the economy from on high.

Yushchenko is walking a tight-rope between maintaining and wooing enough popularity in order to gain a working majority in the coming parliamentary elections, while also at the same time implementing solid reforms which he promised to do in the heady days of the Orange Revolution and which must be in place for economic development to go forward.

Here are some excerpts of this analysis written by James Sherr of the Conflict Studies Research Centre, UK Defence Academy.

In a remarkably swift period of time, the mood about Ukraine has swung from one of expectation to disappointment. The change of mood has been unreasonably swift. President Yushchenko has only been in office since 23 January, and preliminary judgements might be premature ones. Yet conditions are also unreasonable.

Political reforms transferring important powers from the President to the Verkhovna Rada, the country's parliament, are scheduled to take effect in the autumn, and parliamentary elections will take place in March 2006. The President therefore has little time to use the current powers, afforded by the country's 1996 Constitution, to launch profound and systemic reforms.

'Irreversibility' cannot be achieved in so short a period, even if it is exploited to the full. What can be achieved is to demonstrate that the new leadership has the will and competence to change the nature and not only the image of the system that has governed Ukraine since 1991. In this, so far, it does not appear to be succeeding.

. . .For all their repugnance towards the culture of power in Ukraine, President Yushchenko, Prime Minister Tymoshenko and many of their closest allies built their careers inside it. The new leadership, therefore, is exercising power with many of the forces, instruments and instincts of the old. It represents a principled break from the past, but not a clean break.

Not only is the bureaucracy intact, so is Ukraine's deeply flawed legal system. Law in Communist and post-Communist states has rightly been called a system of 'codified arbitrariness.

Ukraine's assortment of laws, codes and 'normative acts', rife with contradictions, gaps, permissive powers and regulative minutiae, has not only stimulated arbitrariness, but criminality and corruption. It has also usurped many of the normal prerogatives of entrepreneurship and management, thus as in Soviet times persuading people that 'initiative is punishable'.

. . .Economic conditions are difficult and, in the energy sphere, worsening. During the pre-electoral period, state property and budgetary resources were redistributed and pillaged on an unprecedented scale. Russian oil prices increased 25 per cent between January and March, and steep increases for the price of gas (from Turkmenistan as well as Russia) are likely to take effect in January 2006.

These conditions make tax reform and (legal) wealth generation urgent. Since 1991 state and local budgets have collapsed, yet state and local bureaucracies have grown. That relationship is no longer sustainable.

. . .The faults reflect:

WEAKNESS IN LEADERSHIP AND COORDINATION
. . . If Yushchenko has confused leadership with inspiration, [Tymoshenko] has confused it with control and, to the astonishment of many in Ukraine's business sector, these controls are taking the form of Soviet style 'administrative measures' which extend to the micro economy. In his other ministerial appointments, Yushchenko deferred considerably, perhaps excessively, to his coalition partners. The result is a 'contra rather than a pro' group of like-minded professionals and, at the top of the state, a realm rather than a team.

ABSENCE OF ADMINISTRATIVE REFORM - Ukraine's largely Soviet era bureaucracy-opaque, inflexible, meddlesome, jealous of its powers and oblivious to their effects-is a fundamental obstacle to the creation of a state in which 'man is the architect of his fortunes'. If the power and scale of bureaucracy are not diminished, and its working practices not transformed, Yushchenko will not succeed.

STATE MEDDLING INSTEAD OF ECONOMIC REFORM - The previous tenure of Yushchenko and Tymoshenko in government gave the West-and much of the Ukrainian middle class-every confidence that they were committed to the rules and institutions of a liberal market economy.

That confidence has been shaken. The decision (20 April) to revalue Ukraine's currency, the hryvnya, was taken without warning to those who would be affected by it, as was the decision to abolish tax privileges of entrepreneurs in free enterprise zones.

What conclusions are businesses expected to draw when a tax regime, integrated into marketing, pricing and investment strategies, is replaced without consultation or notice?

Tymoshenko's decision to impose temporary caps on oil prices (since reversed by the President) has been defended by some as an anti-monopoly (and hence free market) measure.

But this defence cannot be stretched to justify price controls on meat or subsidies on electricity, and the decision to increase public sector salaries by almost 57 per cent flies in the face of economic reality. Although she has since reversed herself, Tymoshenko also spoke of renationalising, rather than reprivatising some of the state enterprises sold off on dubious terms during Kuchma's presidency. Her reasoning seems to be that since she has the power of the state behind her, she should use it.

The reasoning of Valentyna Semenyuk, an ardent socialist and Head of the State Property Fund, is classically ideological. If her appointment is a calculated concession to the Socialists (who have already been awarded the Ministry of Agriculture and the Ministry of Internal Affairs), what is the calculation?

These measures, half-measures and reversals (which have come to a head in the reprivatisation issue) have shaken confidence not only in the government's principles, but its competence.

. . . For how long will Yushchenko or Tymoshenko inspire confidence if inflation mounts, if the petty, daily institutionalised abuses of power are not addressed, and if people begin to realise that nothing has changed? If the opposition is too shattered to deny the coalition victory in March, then is it really essential to hold the entire coalition together, and who will benefit from the attempt: Yushchenko or coalition partners whose vision of Ukraine's future differs from his own?

Who will believe that real reform will begin after these elections- entrepreneurs? investors? neighbours?-if no firm direction is set before then? The risks of hesitancy are that friends lose interest and enemies become engaged. The risks of leadership are not only fewer, but better.

The . . . question is whether today's errors are correctible or whether they are congenital, the product of incapacity and incompetence. In Russia, there are many who claim to know the answer. In the West, the question is being posed. The considered, prudent answer is that today's errors are correctible, but not self-correcting.
Two mechanisms are needed to assist the process.

To reiterate a far from novel point, 'the worst outcome [for Ukraine] would be if [Yushchenko] wins and then fails'. Yushchenko is very far from failure, but it would be unwise to forget that he is also very far from success.

2 Comments:

At 12:25 PM, Anonymous One Eyed Cat said...

The Ukrainian government lacks a cohesive strategy as to how to conduct reforms. The longer they draw out reprivatization, the less likely an investment boom becomes. Too much is going on at once ... The reforms enacted in December will make things more difficult. The makeup of parliament will improve after the '06 elections, but results are needed now. Yuschenko simply *must not* fail.

OEC

 
At 10:46 PM, Blogger Perun said...

A good historical parallel can be found in the example of the Indonesian leader Sukarno, who used his charisma to lead his people to independence from the Dutch. Yet after independence, he failed to address the economic concerns of his people, and largely tried to become influential geopolitically in the non-aligned nations during the Cold War. Things got so bad, his regime was eventually overthrown by the military.

You mention the need for Ukraine to transform from a state-economy to a free market. Exactly what kind of "free-market" should Ukraine adopt? A "free-market" that benefits large corporations? Then you'll replace big government with big business; or as the writer GK Chesterton explained in his "Outline of Sainty", "Hudge" with "Gudge".

If however, you mean a free market that actually benefits the small businessmen, farmers, workers, etc. then I agree with you.

However I do not feel that EU membership is the way to go. Ukraine has fought long and hard for political independence, why surrender our economic independence?

Btw, Im also an American of Ukrainian descent who takes deep pride in my heritage. :)

 

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