James Sherr: the Government is Moving in the Wrong Direction

Next week Ukraine is going to see two significant events: a session of the Ukraine-EU Cooperation Council sum up the first results of cooperation between this “postrevolutionary” country and Brussels, and the so-called “mini-Davos,” an unscheduled roundtable under the auspices of the World Economic Forum, to be held on June 16-17. Ukraine is pinning great hopes on the latter event: its results will reveal the true intentions of foreign investors with respect to Ukraine. As Vice- Premier Oleh Rybachuk announced earlier, the forum will be attended by 200 to 300 delegates. Besides, four presidents — of Poland, Georgia, Lithuania, and Estonia — were invited to participate. (Last Thursday the Embassy of Poland denied rumors that Aleksander Kwasniewski would not show up.) Will Ukrainian officials manage to convince foreign businessmen that the Ukrainian economy is attractive? Have the government’s latest actions tarnished Ukraine’s “economic reputation?” This is the subject of the interview granted by Dr. James SHERR, Fellow of the Conflict Studies Research Centre, UK Defence Academy. In his answers, he expresses his own views, not those of the UK Ministry of Defense. This perhaps adds more value to his comments because he speaks frankly and uses no veiled words.

What do you think about the possibilities of investments into Ukrainian economy after the Orange Revolution?

A few months ago, they were extremely bright. Now they are looking grim. There are three reasons for this.

First, the Kuchma regime was a system of power. In its cynical and deeply unsatisfactory way, it was predictable. President Yushchenko has not yet created a system of power — or, in democratic language, a system of authority underpinned by a coherent set of policies. The state leadership and government now comprise divergent forces with divergent ideological premises, and they are pulling in divergent directions. On top of this, personal agendas and power struggles seem, once again, to be taking precedence over compelling and urgent national interests. More puzzling still, the President has not used his authority to bring these forces to heal and put a like-minded team of reformers in place. He has been an inspiration, but I am not sure that he has been a leader. Inspiration is a remote and otherworldly quality. Leadership is a direct and practical quality, and it has not been in evidence. So, the considerable number of potential investors — not to say political decision makers and analysts like myself — who hoped that Yushchenko’s first 100 days would be like the first 100 days in Poland in 1989 have become disappointed, worried and disorientated. People do not invest when they are disorientated.

Second, the dominant tendency of economic policy is socialist, often crudely socialist — not necessarily in its intent, but in its content and consequences. If the President confuses leadership with inspiration, it is becoming more and more plain that the Prime Minister confuses leadership with control. And the appetite for control is visible not only in the macro economy, it is extending to the micro economy, with controls on prices of oil, electricity, meat and (to judge by the cumbersome and punitive tax regime) the way people decide to spend their money. If there is to be private (i.e. voluntary) investment in Ukraine, there have to be market incentives, along with the stable framework that makes these incentives meaningful. That means, first and foremost, respect for contracts and property rights, a predictable and impartial legal system and a uniform and enlightened tax code. With regard to every one of these essentials, the government is moving in exactly the wrong direction.

Third, politics — especially the March 2006 parliamentary elections — is trumping sound economics. It encourages populist measures, such as price controls and financially disastrous increases in social spending. These measures are counterproductive even in the short term, because it takes little time for ordinary citizens to discover that the consequence of ‘just’ prices is shortages (not to say black markets and corruption), and well before March 2006, they will also see that their higher pensions and wages are being eaten up by inflation. Politics also inhibits the President from intervening, because he fears that he needs Tymoshenko as an ally before these elections and possibly after them. Hence, some speculate that he is deliberately staying aloof so that she can fail — and so that she, rather than he, will be blamed. I hope these speculations are wrong, because this would be a cynical, not to say risky strategy, and it would not surprise me if the Party of Regions, rather than People’s Union Nasha Ukraina ended up being the beneficiary of it. And why has this happened? After the Orange Revolution, President Yushchenko had the authority to do exactly what he thought was right. Why has he not used it? However this question is answered, the message to investors appears to be: nothing will be decided before March 2006, so don’t invest now. Can the country really afford this?

Don’t you think that the largest world companies were disappointed because of the last steps of Ukrainian government (the state regulatory of the oil- prices, the unclear process of re- privatization, the measures in the social sphere which are not connected to the market economy and so on)?

Of course, and I have tried to explain why. But let me mention two additional factors. First, this eclecticism and regression have a far harsher effect on small entrepreneurs than on large corporate entities. Ukraine is rich in entrepreneurial talent, but it has been starved of entrepreneurship. The explanation for this paradox is simple: entrepreneurs have been given no decent incentive to go into business. Big companies have big friends. They can budget for uncertainty and, indeed, reverses. Small entrepreneurs have to get things right the first time or they risk losing everything they have. Yet they are the real foundation of a liberal market economy and the general prosperity of ordinary people. They are also one of the foundation stones of civil society and the accountability of the state. If small business is weak, society is weak, and defences against irresponsible power are weak.

Second, how will these policies advance Ukraine’s integration into Europe? Several months ago, most of us were hopeful that Ukraine would be granted market economy status by the EU in June. But Rybachuk now admits that this is unlikely to happen. Instead, the Luxembourg meeting of the EU- Ukraine Cooperation Council is likely to be dominated by the issue of price controls in Ukraine. Who can now be optimistic that Ukraine will be admitted into the WTO in November, as we so strongly hoped? Dare one ask the most worrying question of all — what lies behind all of this? Does someone believe that market economy status and WTO membership are moral entitlements for Ukraine, irrespective of what sort of economy Ukraine actually has? Or is someone trying to turn Ukraine away from EU integration towards a different direction?

The US Ambassador in Kyiv Mr. Herbst said that there is corruption in the new government. What is your evaluation of the efforts of new authorities in fighting corruption?

The authorities are dealing with the symptoms of corruption rather than its causes, and they are dealing with these symptoms very, very selectively. Why so selectively? The more respectable reason is that some of them know that corruption is a bottle without a bottom, and if they let the genie out, there will be no end to fear, recrimination and paranoia in the country. The threat to investigate 3,000 privatizations is a classic example of what should not be done. The less respectable reason is that the authorities are afraid of discredition materials that could be used against them, so they pick their targets very carefully. So once again, there is no clear strategy and no consistency between one action and the next.

Is it easy to have a clear strategy? No. Is it possible to have a clear strategy? Yes. But that is a subject for another interview.