10 March 2016

Ukraine’s Turbulent Path of Reforms


In Kiev, another very turbulent month has just ended, bringing more political uncertainty and public distrust than concrete answers. Among other factors, the Ukrainian president’s call on the Prime Minister to step down, due to his inability to proceed with the reform agenda, has exposed a very fragile political environment. The no-confidence vote which Yatsenyuk survived is another symptom of an indecisive path towards reforms for the country. It is hard to imagine that anyone among the Euromaidan activists or the international community foresaw such a development at the time when the reform-oriented coalition agreement was signed. Back then, the country’s leaders made a declaration that they had chosen to work for a European path for Ukraine. However, what Ukrainian leaders ought to do in order to implement this declaration is to walk the whole way towards a stable market economy and to enforce the rule of law. This road runs through an array of institutional and economic changes that still need to be implemented.

Undoubtedly, Ukraine should be praised for its recent successes as its balance sheet of reforms slowly has become more encouraging to look at. Many highly-skilled Ukrainians have sacrificed their attractive wages in the private sector for jobs in the under-financed government institutions. Others have even returned to their homeland from Europe and North America after the Euromaidan revolution, to help in this mission. As a result, some reforms have already become visible in Ukraine. Major cities are now patrolled by a newly created police force, supported by increasing public trust. Ukraine’s currency, the hryvna, has been stabilised. Large industrial plants whose operations are dependent on the supply of oil and gas no longer fear a cut-off by the Russians – by and large Ukraine has secured the diversification of its energy sources, in particular through the reverse flow from Slovakia. And although corruption, one of the major issues in Ukraine, is far from tackled, the government has launched a transparent online system for public procurement. This software alone has saved over $17 million since it was introduced. The list of success stories is already impressive and growing in number.

While it is important to highlight the positive developments, it is just as useful to acknowledge the weaknesses. Ukraine is still suffering from many problems that were characteristic of the pre-Maidan political landscape. I am still concerned about the disunity of pro-Western political players in Ukraine. The cooperation within the parliamentary coalition is weak and turbulent, with many bottlenecks around major policy issues, including the Ukrainian “3D reform matrix”: de-oligarchisation, de-regulation, and de-monopolisation. Paradoxically, the situation provoked by the actions of President Poroshenko and the resulting instability around the government can be used as a motor for positive change and be turned in favour of Ukraine’s development. This is a crucial point in which reform-oriented political forces in the Verkhovna Rada can turn their back on the unhealthy political behaviour of the past and restart politics with new rules based upon the principles of cooperation and commitment to the same goals. My fear is that this could be the last chance for those capable, moderate and pro-Western politicians to assume responsibility and lead Ukraine. However, if they do not succeed in this, the situation will most probably play into the hands of populists and revanchists from the old Yanukovych elite, who will thus be able to block legislation vital for any meaningful change in the country.

Unfortunately, populism is a widespread phenomenon across the Ukrainian political spectrum. Due to political populism across several sectors, the process for key reforms has ground to a halt. This is the case with the much needed reform for decentralisation, where populism has prevented an amendment of the constitution which is needed in order for the reform to go ahead. Playing on national and patriotic fears in this case is beyond any ethical behaviour. Decentralisation in Ukraine will not only meet the obligations under the Minsk II Agreement – providing for a special status for Donetsk and Luhansk –, but it will also modernise the Ukrainian state. Implementing this reform will therefore offer no excuse for the other side if they break the Minsk Agreement. At the same time, it will strengthen local government, reduce unnecessary state administration, provide for better management and efficiency in spending public resources, and finally bring about subsidiarity and accountability closer to the people.

Another case in point where demagogy has been working against progress and change has been the adoption of tax reform in Ukraine. The country needs a sensible, yet liberal, comprehensive reform of its revenue policies. The liberalisation of the tax regime has one prerequisite: the level of public expenditures has to be decreased significantly. After this reduction, it will be possible to lower the tax rates, in particular the unsustainably high payroll tax, while still achieving balanced expenditures and revenues. Even though this makes perfect sense to anyone interested in boosting entrepreneurship as well as combating a vast grey economy sector and tax avoidance, the legislative progress of this reform is blocked by irresponsible and populist politicians. To rub salt in the wound, one can cite more examples of how political populism is blocking such vital changes as the civil service reform, further cuts of insensible subsidies in the energy sector, or fully-fledged anti-corruption investigations against government officials. This is where the dissatisfaction with the slow pace of reforms originates. The long-term cure for avoiding populism and the resulting political impasse will build a culture of political compromise.

Furthermore, when I look over the success stories of Ukrainian reforms, there is one thing common to all of them. All these successfully implemented changes have a clear reform ownership and leadership. You can easily associate the success of new police reform with First Deputy Minister of Internal Affairs Eka Zguladze and the new public procurement system with Deputy Minister of Economic Development Maksym Nefyodov.

This shows that strong leadership is essential for sustainable change. New policies have to be implemented, and new institutions have to be built not only as a result of pressure from outside, say the IMF or the EU, but Ukrainians themselves need to believe that reforms, often painful and unpopular, are necessary for their prosperous future. Largely, it is the shared burden of the government, civil society and businesses to increase public confidence in the reform process. The public–private partnerships are especially relevant in the process of communicating the long-term benefits of institutional transformation. However, it is the job of Ukrainian political leaders to assert responsibility for pushing for faster and deeper reforms.

What needs to be mentioned as well is the widely discussed anti-corruption struggle in Ukraine. At the moment, the endemic corruption in the country is the main obstacle to the flourishing of reforms in all sectors. Ukraine is slowly building new institutions (e.g. the National Anti-Corruption Bureau) and legislation (e.g. law on the prosecutor’s office) to equip itself with better tools for the fight. Unfortunately, that equipment has not been put into operation yet. Zero tolerance towards corruption is the only way. It is vital to act fast while adhering unconditionally to all legal procedures. The sustainability of any other structural reforms is highly dependent on a corruption-free judiciary, prosecutor’s office and law enforcement agencies. A positive sign which we have seen recently is the resignation of the Prosecutor General, under public pressure. This resignation sends two important signals: the first is that civil society is very active and that it is one of the biggest engines of reforms in Ukraine; the second is that there is a chance that reforms are being taken very seriously at higher levels.

Another serious reform which the country needs is massive privatisation. This will not only bring revenues to the state budget, but will also contribute to the necessary restructuring of Ukrainian industry, and will substantially reduce corruption in the state-run economy.

One can also consider the role of the West in Ukraine’s reform efforts. In order to speed up the pace of reform, and to maintain the conditionality from which other Central and East European states benefited, I find it of the utmost importance that the West maintains the open-door policy of welcoming Ukraine into NATO and the EU.

While on the one hand we need to demonstrate that a democratic Ukraine has many altruistic friends in Europe, on the other, we also need to be able to offer meaningful advice for reforms. The key lessons we have learned since 1990 with the reforms in Central and Eastern Europe are by and large applicable to the case of Ukraine today. This should not mean that the reform path of a particular country, say the Visegrád Four members, needs to be replicated, but rather that the principles which were followed in post-communist Europe also hold true for the EU’s Eastern Neighbourhood. Political determination for comprehensive reforms brings about positive economic change. Despite many disparities in the Eastern EU member states, the results are at hand; living standards have improved significantly throughout the region. We also need to be self-critical and look at reform sectors which have not worked as expected in many Eastern member states and to avoid these same errors in Ukraine, for example in the domains of the judiciary, media freedom and the battle against corruption.

That openness towards Ukraine has to be reinforced by a strong response to the Russian military aggression in Ukraine. The sanctions cannot be lifted until the Minsk II Agreement is fully implemented. Among other things, this means that a firm stance towards Russia will have to be maintained at least until Ukraine regains full control of its Eastern border.

At the end of the day, despite any type of Western support, it is the Ukrainians themselves who have to assert responsibility for their geopolitical choices and pro-reform agenda. Despite the uncertainty and the current instability in Ukraine, I am prone to see the positive change and some of the visible results. Ukraine is changing for the better and we just want this to happen faster. The glass is half full rather than half empty.




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