Why I am optimistic about Ukraine

Ukraine's Independence Day in 2017 Photo: Olena Makarenko 

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Article by: Dirk Mattheisen

Buffeted by rapacious oligarchs and invasion by Russia, Ukraine seems an unlikely success story. However, renewed economic growth is fueling a growing sense of optimism and of opportunity. There are a few things getting in the way. But first the good news.

Ukraine’s economy is projected to grow 2.0% this year and then accelerate to 3.5% in 2018 and 4.0% in 2019, driven by a steady growth in consumption of 3% per year and in exports of 1.6% in 2017, 3% in 2018 and 5% in 2019 (recent government estimates of growth are slightly lower but still very similar). Already in 2017 exports to the EU in the first nine months are up 29.1%, which indicates the rapid pace at which Ukraine is taking advantage of access to EU markets). The business press is full of stories about new businesses and investment opportunities, including highly innovative, internationally competitive startups, such as Google’s Grammarly, which was developed by two Ukrainian entrepreneurs in Kyiv, as well as countless “locally-grown” tech startups and micro-enterprises. There is constant chatter about fashion and advertising video shoots in Kyiv, including the recent Apple Watch 3 video, adding cultural flair to the economic momentum.

Ukraine Finance Minister Oleksandr Danyliuk said all the right things in September in the lead up to the World Bank/IMF annual meetings. He pointed to the government’s tough measures to stabilize the economy with the support of a US$17.5b IMF program. He also emphasized the seriousness of the government’s efforts to improve the business climate, such as in tax and customs administration for which Ukraine had hired an international consultancy firm to help run an anti-corruption program and invited the US, Germany, EU, EBRD, and Canada to sit on the supervisory board to ensure the program was not derailed. Danyliuk emphasized that many reforms had been instituted, but it was also now important for the people to feel the effect through improved living standards by not just eliminating high level corruption but of eliminating petty day-to-day corruption.

However, despite the optimistic outlook, Ukraine needs to take advantage of this period to restructure its domestic economy.  Failure to restructure will slow growth and diminish overall economic prospects.

For example, the World Bank estimates that reforming land ownership laws alone could lift economic growth by 1.5%. This is critical because, as welcome as 4% GDP growth may be, Ukraine has to grow faster for people to feel, as Danyliuk emphasized, a meaningful impact on their well-being. At $2,200, Ukraine’s GDP per capita is roughly a quarter of Russia’s (though more equitably distributed) and among the lowest among the former Soviet republics; to counter Russia’s existential threat to the country, Ukraine needs to increase GDP per capita by several orders of magnitude to demonstrate that its economic model can deliver benefits comparable to other countries.

Ultimately, Ukraine needs to aspire to be a regional economic power in its own right, which would be good for Ukraine and for Europe–nothing would supercharge Ukrainian and EU economic growth like welcoming into the EU 40m talented people with an impressive endowment in resources and a strategic geographic position.

To visualize Ukraine’s economic potential, compare its GDP of about $93 bn to Poland’s GDP of about $480 bn with roughly half the area of Ukraine and the same population. Twenty-five years of serious economic reform separate Polish GDP from Ukraine’s. A more serious effort by Ukraine is necessary to make up the difference in a shorter period of time. As Poland shows, economic growth does not solve all the problems, but it is an essential start.

To make that happen, Ukraine has to get a grip on pervasive corruption that is fueled by lack of respect for the law, ineffective law enforcement and widespread self-interest over civic interest in government and business. Rule of law was the core of the 2014 Revolution of Dignity which, despite substantial progress, remains an aspiration.

Above all, reform has to be credible.

Liberalizing the land market is useless without a reliable cadastral system and market transparency that prevents raiding and speculation. Judicial reform is useless if incompetent or corrupt officials continue to be appointed. The recent appointment of 25 judges with histories of questionable decisions and improbable wealth undermines reform. Criminal charges against public officials, such as those against Ukraine’s General Prosecutor, Yuriy Lutsenko, need to be prosecuted in accordance with the highest legal standards and not subverted by legal artifice that fails to hold wrongdoers accountable. Lack of progress will erode vital international support (as evidenced by the recent halt due to unfulfilled anti-corruption conditions in the EU’s macro-financial assistance program and a slowed IMF program).

Political reform is integral to ending corruption and achieving economic success.

For reform to work, the political process has to serve society’s needs. It can’t if the political and economic elite, including President Poroshenko and members of his government, behave as in the past. The reformists can try to wait out the entrenched interests, risking that the reform process will peter out; or, they can find ways to breath additional life into the process.

Civic activism is essential; and entrenched interests have to support the reform process, which may require some form of selective amnesty for economic crimes committed before the Revolution of Dignity, which these interests fear will expose them to prosecution, and a commitment that they not stand in the way of or undermine further reform. Entrenched interests will not disappear, but they must be made to fall in line.

Timing is crucial. The 2019 presidential election is warming up. It can be a watershed moment in surmounting corruption. President Poroshenko has been effective in leading the economic stabilization program with the IMF and in introducing many of the needed reforms. His resolute defense of Ukraine internationally and support for association with the EU has elevated recognition in the West of Ukraine as a democratic nation distinct and separate from Russia.

However, he has also failed to live up to personal commitments as president, including putting his extensive business interests ahead of the national interest by forming a blind trust; many of his businesses are held in offshore corporations of the type that are used by oligarchs to hide assets and avoid taxes. Extraordinarily wealthy individuals fuel corruption if not checked by law, and they have yet to yield or share power in Ukraine with the next generation of business, government and political leaders who will build the new Ukrainian society. The 2019 election is a good moment for anti-corruption and political reform not just to be declared but to become real in order to unleash the rewards of reform.

Otherwise, popular frustration may overflow. Although recent pro-reform protests in Kyiv fronted by Georgian political activist Mikheil Saakashvili have been small—in part due to the seeming self-interest of its most prominent sponsors, Saakashvili and Yulia Tymoshenko, there is still widespread impatience with the slow pace of reform.

Though the protests have been small, the political risk is not. The “impeach Poroshenko” protest, again led by Saakashvili, is a portent of worse to come if reform is derailed. Public unhappiness will grow, especially if the politically unpopular Porochenko continues to provoke friction with highhanded political assaults on Saakashvili and other opponents and backroom maneuvers to enforce his control of the government. The focus needs to be on advancing anti-corruption and economic reforms and upholding the rule of law, including in politics. Messy disputes (such as this) between anti-corruption authorities and security services and mutual claims of corruption don’t help.

For all the risks, the promise of change is irreversible. Ukrainian society is no longer capable of sliding back into conformity and submission. Ukraine’s transformation into a more just and inclusive society is in its early stages but even now entrenched interests cannot contain Ukrainian society’s new aspirations nor its new economic promise.

Fundamentally, what distinguishes Ukraine is not its historic association with Russia. Cast between competing empires (and sometimes known as the borderlands), Ukraine has a powerful egalitarian tradition based on the independent-minded Cossack warrior-farmer (reviled during Russian-dominated Soviet times as kulaks). This tradition is a distinct cultural identifier setting Ukrainian society apart from a more hierarchical and authoritarian Russian society, something Stalin understood as a threat and attempted to extinguish through state-sponsored genocide in the 1930s.

Completing the key reforms today will transform Ukraine into a democratic nation and an economic power in Europe. In the future, when one speaks of Ukraine–a strong European nation at the heart of a unified Europe—one will be able to say that it’s democratic institutions were formed on its distinctive traditions that Russian imperialism failed to crush and on the renewed vitality of its civil society.

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