Policy Briefing:

Planning Minister of Ukraine

To President Viktor Yushchenko

January, 2010

Abstract:

This is a proposal for the radical overhaul of the Ukrainian economy as it sinks into fourth world status. The economy is not merely contracting, it is disappearing. Reforms here will be rough and will make the president many enemies, but it must be done before Ukraine becomes the Ghana of Europe.

Table of Contents:

Introduction – 1

Some Ideas from the Literature – 2

Summary of Proposals – 7

Bibliography – 8

I. Introduction to the Ukrainian Crisis

Last year, the Ukrainian economy went into the worst tailspin since the dissolution of the USSR. At present, the economy has shrunk by a huge 30%, as the president has himself admitted (Hugh, 2009). Unemployment is roughly at 20% of the working age population (while Belarus stays steady at 1%), and almost 40% of our people stand below the poverty line, as estimated by the American CIA. Ukraine's foreign debt stands at 15% of GDP. Our inflation rate stands at over 20% and it is climbing. The Kyiv Post (cited by Huges) holds that the economy will continue to shrink in the coming year. The same source reports that almost 60% of Ukrainian exports in our largest areas such as steel and chemicals, has dropped off completely. Construction has dropped off more than half. You yourself stated in a speech to the Rada last year:

Really looking at all this, what we have here is a country in total monetary, financial, and economic disarray, and this is before we even start to think about the demographic unwinding which lies ahead. No wonder Dominique Strauss Kahn recently warned of the catastrophe which looms before us. I seriously doubt any knows what to do about all this, I certainly don’t. Tear my hair out perhaps. But I already have precious little left.

We need no further evidence of the failure of the Orange Revolution, of which you were the primary beneficiary. The bigger issue here is what to do to change this. The basic goals here are clear: growing the economy over the next few years to the older rate of growth under your predecessor, that is, by 6 or 7% yearly. To reduce our foreign debt and shrink unemployment are necessary components of this. Even more, corruption must be fought at all levels of society.

We have several things going for us: our civil liberties are considered strong and well protected (Freedom House, 2009). We have a democratic political system with a strong, pluralistic media. We have a high rate of literacy, and we have excellent natural resources. It is these upon these building blocks that we will re-create modern Ukraine from its present fourth world status.

II. Some Ideas from the Literature

One of the most insightful commentaries on post-independence Ukraine comes from the US-EU Partnership, which published a major study in 2008, assessing our 16 years of independence up until that time. The list of problems identified will give some sense as to the role ahead for Ukraine.

Primarily, the issue is corruption. This commission has stated numerous times that no Ukrainian government, including the present one, has done anything significant to eliminate corruption and the huge black market in the country. Specifically, it is our Ukrainian regulatory bodies and the courts that they singled out for condemnation (Bugajski, 2008). Therefore, it seems to me first of all that the President should appoint a commission, backed by military power if necessary, to deal with corruption issues at all levels of the state and the economy. Arrests and harsh punishments must be legislated for officials in the public and private sector that are taking bribes, paying off local police or granting favors to friends. Without attacking corruption, there is no sense in dealing with any further economic and social reform. Of course, the main problem is that our political parties are largely vehicles for these same corrupt figures (Bugajski, 2008). Therefore, the president must make this part of his own office and the minister of the interior and even the defense ministry must be made aware of this anti-corruption drive. It is unfortunate, but harsh measures will likely be the case. Vladimir Putin in Russia has shown what can be done, and his popularity continues at over 80% in Russia, while our government is not half as popular.

While this might sound strange, it seems that our political system has no real guiding ideology. Our political parties, with the sole exception of the old communists, have no real ideological framework or proposals from which to reform. Of course, this is quite deliberate, given the poor basis of our party system. Putin in Russia has made it clear that no regional parties will be permitted – parties must be national. There is much top this proposal. At present, our Ukrainian parties are divided between the oligarchical, Donbas coal and steel producing areas from the old USSR and the more agrarian western Ukraine. This regional divide has paralyzed governments since the inception of our democracy and has discredited democracy in the minds of the people. What good are democratic institutions when the economy is disappearing and parties are vehicles for personal gain? Part of your anti-corruption drive might be to ban regional parties and force political parties to represent the nation rather than regional economic interests.

The US-EU commission has also pointed to the inefficient education, health and pension fields. It has been rumored that one can buy their way into Ukrainian universities (Bugajski, 2008). Corruption and inefficiency in these fields must also be included in this anti-corruption drive. It seems to this writer that the harsher you punish those who steal the labor from the Ukrainian worker, the more popular you will become. The Americans might not like it, but that has not stopped Putin or Lukashenko, both immensely popular at home with thriving economies. Their example should be followed. The building of a state sector that is loyal to Ukrainian nationalism and our orthodox faith, as well as being young and idealistic reformers, is an absolute must for the rebuilding of our fractured and sick society.

Most importantly, transparency must be brought to our energy sector. Partnership, rather than confrontation, with Russia is the only way out here. We remain dependent on Russia for energy imports. This need not be fatal for Ukrainian independence if the two Slavic states see each other as brothers rather than competitors. Furthermore, the US-EU Commission report also states that we are wasteful users of energy, since the state keeps prices artificially low. Prices should be market based, or at least negotiated in good faith with Russia. In fact, state intervention in prices should be stopped.

Ukrainian-American writer Taras Kuzio has identified a four-prong transition for Ukraine that is worth considering. These are:

  • Command economy to the market
  • Totalist political system to democracy
  • Part of a larger empire to a national state
  • Uneven identity to a strong Ukrainian one

We have failed in each and every one of these issues. Our market is state controlled, our democracy is based on oligarchy, we remain dependent and we have no real overriding identity (Kuzio,1998). Reaching this, we can consider the proposals of John Tedstrom (1998). These are more or less specific proposals that should be taken seriously.

First of all, there is the “macro-mission” of the state relative to the economy. This includes the stability of the financial sector and the currency, as well as transparency in the regulatory agencies. The state must step in here to control the inflation rate and root out corruption in the regulatory sector. Even more, the state should be in charge of the economic independence of Ukraine, seeking to boost exports outside of the Slavic sphere. It might be useful to engage in regular trade missions with the Germans, as the Russians have done, separate from the European Union. Lastly, Ukraine should be integrated with the stronger Asian, European and North American economies. It might be useful to offer substantial tax breaks for those who seek to invest in our steel, gas or chemicals sector. Again, none of this will work without a strong stance against corruption.

However, the best plan for reform derives from the (2000) essay by V. Zviglyanich. In this essay, he lays out a three pronged plan for radical reform. The three sectors are:

  • Stabilizing production: like the above, this includes the control over the currency to eliminate high inflation, and to do whatever is necessary to help create a large, small and medium size business class in the country.
  • The state must play the leading role in reform, even if the presidency has to act alone. This was the case in Belarus and Russia, and they can boast of excellent economic results.
  • The growth that Ukraine wants is a rather slow, but even and evolutionary growth that can increase production without spurring inflation. From here, the state can then permit prices to float.

In addition, we have the work of Alexander Motyl to consult for further measures of reform. In Motyl's work, he holds that the real challenge facing Ukraine is overcoming its old colonial-dependency relationship with Russia and the other states of the former USSR. Only in consolidating, under state protection, Ukrainian industry can this be overcome. It may even be necessary to go to Iran and other states in Central Asia for out oil to break the dependency on Russia in this central sector. Motyl holds that the old and tottering Soviet infrastructure in the east of the country, including agricultural equipment, coal, steel and other metals need a radical overhaul. Their infrastructure is from the Brezhnev era and this needs to change. Unfortunately, the corruption that so plagues Ukraine is really based in the eastern, post-Soviet industrial belt centered at Kharkiv. It may be useful to do whatever is necessary to bring the party of Regions, representing most of this area, into a close electoral unity with our own government. We should keep our enemies closer than our friends. Without the cooperation of this party, it is going to be difficult to engage in serious reform without giving the regulation of the economy over to the military forces of the country. Unfortunately, we must also consider that extreme possibility and (quite possibly) seek the Korean model of development here. This would no doubt destroy our relations with the European Union, but might open the Asian markets to us.

Motyl holds that the eastern part of the country cannot be reformed without violence. This is because the political and economic interests of this area are too entrenched. Might it be possible to invite Chinese investment into this area? Would not the Chinese discipline control the old-school oligarchs in this area? Even more, would the world be that outraged that old Soviet bureaucrats are thrown in prison in the east? Few economic actors in the world hold the western Ukraine to be any prize. This is because of both the corruption and the complete collapse of the infrastructure in the industrial heartland of our country.

III. Summary of Proposals

Ukraine is a potentially rich country. It was both the industrial and agricultural heart of the USSR. We have a high literacy rate Therefore, in order to get the economic system on track, this paper has used the reform literature on Ukraine to make several statements:

  • A Presidential commission, in cooperation with the Ministry of Defense, must be called to wipe out corruption. No doubt some rough methods will need to be used given the comparative wealth and power of the oligarchs we must remove.
  • A groups of young reformers from Ukraine, Russia and Ukrainians in the diaspora should be hired to create a new bureaucracy around the president to engage in reform
  • The Orthodox churches in the should also be drafted into holding an important place in the moral reform of Ukraine. The resources of the church should be used to help raise public awareness of the corruption and the president's commission to destroy it. It seems also wise that an orthodox identity should become a Ukrainian identity. Most of our people are of that faith, and it might be the case that a unified church may be a route to heal the rift between eastern and western Ukraine.
  • Russia should be considered a partner, not an enemy. The same goes for Belarus, China and the Central Asian states.
  • Ukraine should engage in a strongly pro-China policy that seeks Chinese markets and investment in Ukraine.
  • Prices in Ukraine should be slowly freed, while the state (not the banks) maintain control over the currency to control inflation.

IV. Bibliography

Bugajski, Janusz (2008). Ukraine: National Assessment of Sixteen Years of Independence.The US-EU Partnership for Ukraine. CSIS Press.

CIA (2009) “Economy of Ukraine.” The World Factbook (

Hugh, Edward (March 31 2009). “Ukraine President says economy Shrank by 30%” Fistful of Euros. ( forecast-for-ukraine-economy-in-2009/)

Freedom House (2009) “Ukraine.” Country Reports: 2009 Edition. (

Kuzio, Taras (1998) “Ukraine: The Four Pronged Transition.” in Kuzio ed. Contemporary Ukraine: Dynamics of Post-Soviet Transformation. ME Sharpe, pps 165-180

Motyl, Alexander (1993) Ukraine: Dilemmas of Independence. CFR Press

Tedstrom, John (1998) “Ukraine's Economy: Strategic Issues for Ukraine's Recovery.” in Kuzio ed. Contemporary Ukraine: Dynamics of Post-Soviet Transformation. ME Sharpe, pps 201-218

Zviglyanich, V (2000) “State and Nation: Economic Strategies for Ukraine.” in S. Wolchak ed. Ukraine: The Search for National Identity. Rowman and Littlefield, pps 237-264

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