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Ukraine — the bastion of a new, better order in Europe

Ukraine — the bastion of a new, better order in Europe
Article by: Oleh Ivantsov, Petro Shuklinov
Translated by: Anna Mostovych

Leszek Balcerowicz, the legendary Polish reformer, discusses oligarchs, the sanctions against Putin’s Russia, the economic policy in Ukraine, and the essence of political leadership.

A little over a month ago, Leszek Balcerowicz, the well-known economist and politician and one of the chief architects of the successful reforms in Poland, became President Petro Poroshenko’s representative in the Cabinet of Ministers. Additionally, Balcerowicz co-chairs the group of strategic advisors who are working with the Groisman government on economic reforms. In this interview with, the Polish reformer discusses the key challenges in Ukraine’s economic policy and his reasons for working in Ukraine with his typical clarity of thought and sense of irony.

In one of your articles on changes and reforms in Eastern Europe, particularly in Poland, you wrote that the Gorbachev factor was an important favorable factor for your country — the likelihood of Russia’s intervention 25 years ago was minimal. In Ukraine there is a different situation now : there is the Putin factor and maximum military intervention. In your view, what demands does it impose on Ukrainian reformer?

To reform more! I do not know any alternative. Ukraine must be strengthened. And there is no other way than through reform.

Yes, the initial conditions in Ukraine two years ago were extremely difficult. There are several reasons.

The first reason— the absence of radical and comprehensive reforms after 1991. I asked my friend Oleh Havrylyshyn, the prominent economist of Ukrainian origin, to analyze how the lack of reforms in Ukraine affected people. Havrylyshyn calculated that if Ukraine had taken the Polish path during the 1992-99 period, the living standards in Ukraine would be several times higher than now. I’m not saying that nothing had been done in Ukraine during this period . There were some reforms, but not enough.

The second reason — the legacy of Viktor Yanukovych. The recession began in Ukraine in 2013. Yanukovych conducted an expansionary fiscal policy at the cost of the future and again in the absence of reforms.  Falling prices on key Ukrainian exports were an additional factor.

The third reason — Russian aggression,  not only military but mainly economic: the blockage of Ukrainian exports from 2014. We must realize that the recession in Ukraine was not the result of the policies of the new Ukrainian democratic government but the direct result of the actions of Moscow. This caused enormous damage to Ukraine.

To summarize: there is no other way but to reform. My experience shows that a good reform strategy consists of comprehensive and quick reforms — not slow reforms, done one by one.

What is your assessment of Western sanctions against Russia. Are they effective?

It is very important that the sanctions remain. Without them, it would mean the approval of aggression. That is unacceptable. The sanctions should continue and I hope the sanctions will continue. Although, of course, the main “sanction” against Russia is the dramatic drop in energy prices and the consequences of Putin’s economic policy which consists of two elements: first, the nationalization of certain companies and sectors; second, the attempt at the so-called modernization from above. Economy does not work that way. It is possible these actions could have been more effective during the time of Peter the Great, but 300 years have already gone by since then.

What do you think of the views expressed in certain EU countries that sanctions should be weakened to keep the Russian economy from collapsing?

There are different views in Europe. But I would like to repeat that this is a matter of principle. If there is aggression, there must be sanctions. And then only after the aggression ends, can the sanctions be eased or lifted. And Russia’s difficult economic situation is tied primarily to the economic policy of Russia itself, which is entirely dependent on the export of natural resources. The Russian economy has the same structure currently as Nigeria. And it is impossible to do anything without liberal economic reforms. In Russian economy there is too much political intervention. And this does not work successfully anywhere.

balt4What kind of problems are you working on in Ukraine and what leverage do you have?

First, I’m not alone. I would have never agreed to work alone because one person obviously cannot do anything. I have a team. I asked my friend Ivan Mikloš (former prime minister of Slovakia) to create a team. Right now we have about 10 people, including colleagues from Ukraine — for example Viktor Pynzenyk, whom I respect as a reformer. There are my colleagues from Poland, including Jerzy Miller, who was my deputy in the Ministry of  Finances in 1997-2000 and who was the minister of internal affairs in Poland. He is very experienced, especially on decentralization. Also Mirosław Czech (Polish politician of Ukrainian origin) is on my team, the Polish journalist and former deputy in the Sejm (lower house of the Polish parliament — Ed.).

Second, we are working for the entire democratic Ukraine — for the president, for the government and for the parliament. I can see a lot of what needs to be done. I know that Ukraine is very important for you, the citizens of Ukraine. But it is equally important for Europe, for Poland. If there is any possibility at all to help, we should all do it. And this is why I’m here.

Third, we are trying to work immediately. We are working with the new government so that the program of the Cabinet of Ministers is accompanies by a packet of solutions. My experience proves that a good reform strategy requires comprehensive and quick reforms and not slow reform, done one by one. It is easier to make comprehensive decisions. And the sooner the comprehensive decisions are made, the faster the results.

You are saying the right things. But Ukrainian practice shows that politicians prefer PR projects over real reforms. Aren’t you afraid that they can use you as cover without taking any effective measures — for example, in the fight against corruption? This has already happened with the first “arrival” of foreigners after Maidan, with the Georgian team?

You know there are no guarantees of success. That is true. But there is an important task. Yes, it is difficult. But we need to try. As I said already, Ukraine is an extremely important country.  It is the bastion of a new and better order in Europe. And the stronger Ukraine becomes thanks to reforms, the better — not only for Ukraine itself but especially for Europe.

How were your initial contacts with the president and the prime minister? Do they understand what you are saying?

I can’t say that there were any difficulties or misunderstandings. Of course, one thing is the development of the program based on previous programs. The president had a program for 2020 where important goals were set. But now there is more specificity — specific steps and methods of implementation. Comprehensive solutions. And it’s very important for the political leaders in Ukraine — especially the president — to make efforts to ensure that this program is implemented, for it to pass through parliament and be backed by laws. This is the task of democratic leaders. We can only persuade, work with public opinion. For that, fortunately, there is pluralism in your country.

But there is also great concentration of power in the president’s hands.

I think that in the United  States the concentration of power is much greater, but no one doubts that the United States is a democracy. In France it is the same, but no one doubts that France is a democracy. Therefore, this is not a danger. If there is a problem, it is the need for good and correct comprehensive programs to get through parliament. And here the role of political leaders is very crucial.

Earlier, when you assessed the types of modernization in various countries, you identified Eastern Europe, where the transition occurred in a democracy. And in East Asia — Taiwan, South Korea, perhaps now in Türkiye — there is a different type of modernization. In your view, what type of political modernization is best for Ukraine.

The most important thing is that Ukraine differs from Putin’s Russia. Maidan vividly demonstrated the democratic preference of many Ukrainians. In this respect, it should be remembered that the absolute majority of authoritarian regimes have failed — not only in terms of human rights but also in economy.

And Türkiye, Erdogan?

Erdogan is destroying democracy. In Türkiye economic problems are accumulating. This is a very big mistake. Individual cases like Singapore are an exception, not the rule. It is very important for Ukraine to have pluralism. And reforms should be done within the framework of pluralism.

Before the interview we spoke with many respected people in Ukraine. We asked them to prepare questions for you. One of your students from Warsaw, who today works in Ukraine, recalls you with great respect and speaks of you as a person who changed  Central Europe. However, in his opinion, you do not completely understand the system that has developed in Ukraine. I quote: “The experience of Balcerowicz is for another country and another historical moment.” What can you say in response?

Well certainly I don’t understand everything. But who does? (laughs) I know that the current situation in Ukraine is very different from the one in Poland 25 years ago. But I have many friends in Ukraine and for that reason I don’t have particular blind spots. And you must understand this. The economics experience that we have on our team is equally beneficial for any country. Economics is like medicine. Take two people with tuberculosis from two different countries anywhere in the world, and the treatment for both will be the same.

The main problems are known: the need to stabilize the state budget by cutting spending, which is enormous in Ukraine. Taxes, the shadow economy. An independent central bank is needed — I think it has a fairly strong team. We can seen the beginning of the process of the restructuring of banks. A good economy is a private economy — the private sector but within the framework of market competition, without privileges and monopolies. How does Poland differ? By the fact that from the very beginning we removed most of the monopolies. And thanks to a radical liberalization we did not allow for the ascension of oligarchs.

This was the next question. What  should be done with the oligarchy?

First of all, it is important to identify the remaining privileges. The removal of privileges is the right way to go. This requires a comprehensive approach.

The problem is that the oligarchs are tightly woven into the political arena in Ukraine. They control the factions in parliament, the TV stations.  And the government needs the parliamentary and media support. Is it a vicious circle?

This is the result of the absence of radical reforms earlier. But, I repeat, it’s important to identify the remaining privileges. The right way to combat the oligarchic phenomenon is by removing these destructive capabilities. It is very important for the revenues in the economy to be generated within a competitive framework.

President Poroshenko is an oligarch as well. How can a person overcome himself?

For me an oligarch is someone who acquires great wealth through political connections and takes advantage of this asset. And I think that this definition is applied much too broadly in Ukraine. In Poland they also used to say that if someone is rich he is an oligarch. But was Steve Jobs an oligarch? Is Bill Gates an oligarch? These people made their fortunes in a competitive market thanks to their talents. On the other hand, one of the richest people on the planet, the Mexican Carlos Slim, obtained his fortune thanks to political connections and through monopolies. The monopoly must be eliminated and the political connections must be removed. At the same time, competition must be strengthened. This is perhaps not the fastest process. But the sooner this is done, the faster the phenomenon of oligarchy will stop being a problem in Ukraine.

What is your personal impression after communicating with the president? As someone who  is very familiar with Ukrainian oligarchs and the way this system works, is he ready to do what you say?

I cannot discuss it in detail. But I have a very positive impression as a result of many meetings with the president. I have no doubt that he has a good understanding of all the major problems and what decisions society expects from us.

But I would like to add that even with the recession that was caused Russia’s economic blockade, much has been done. Ukraine did not have an army — today it has been created. The energy dependence on Russia has been terminated. Earlier you imported more than 40 billion cubic meters of gas from Russia, and now almost nothing. This is the strengthening of Ukraine’s independence. Ukraine’s external trade has been greatly diversified. Of course this was a necessary measure because of Russia’s blockade, but now most of Ukrainian exports go to other countries. Ukraine is gaining new and unfamiliar markets.  You have avoided fiscal catastrophe and although much needs to be done in terms of spending, everything could have been much worse. You were on the brink of the collapse of the banking system. That was real. But the Central Bank team worked professionally. The oligarchic privileges are being removed. The reform of Naftogaz has begun.

Yes, it is normal that when the situation in a country deteriorates people always blame the government for everything. You must demand reforms from the government — I am in complete agreement. Buy you must also fairly judge what has been done and decide if more could have been done in two years.

Perhaps we are too pessimistic.

Journalists are always pessimistic (laughs)

But there are reasons. President Poroshenko is often criticized because he has shielded many functionaries of the former Yanukovych regime, exchanging their political loyalty in parliament for the possibility for these people to remain free and even to engage in shady businesses. And even though certain critics believe these are necessary actions by the president — we do not have another parliament — this has a serious impact on the president’s credibility and on the speed of reforms, because it is necessary to constantly seek compromises between the old schemes and the attempts to liberalize the economy. Do you understand that?  Do you see the possibility is such circumstances to carry out effective reforms?

There is no other way. Let’s be honest, the positive things that have been accomplished in two years could not have been done with another president. Given all the problems that have accumulated in Ukraine, it is impossible to expect that they will be solved in only two years. I find it hard to imagine that in your circumstances much more could have been done. I really doubt it.  There is no need to speculate. It is enough to look at what the democratic governments of Ukraine are doing. And this will be an indicator. And if you talk about corruption, then look at how the General Prosecutor’s office acts under a new leader. Look at how they work and what the anti-corruption entities do in practice, what the business ombudsman does.

Can we expect the system to work democratically and effectively if the Prosecutor General is a friend of the president? Furthermore, almost all the key positions in the country are held by people from the president’s circle.

You simply do not know how things work in the West. It’s always a team. Good teams are made up of people who know each other. In any country a team is created for the elections, whose members then take up key positions. This is not pathological. It is normal. You must look at the results. There is a program. It is important to evaluate its results when it is completed.

You made several references to the diversification of the Ukrainian exports. Before the interview we discussed that with business people. They say the Russian market is lost…

Due to Russia’s actions

… and not only for the agricultural production but also for heavy industry, machinery. Against this background, the European Union remains closed, regardless of the association agreement: there are quotas, limitations. Moreover, the EU demands that all restrictions against the export of raw materials be lifted — metal scrap, forest products. These are EUs double standards. What can be done?

The first thing we did in Poland 25 years ago was to remove all restrictions on exports. To suppress exports is poor policy. This decision is relevant for Ukraine as well. Countries like Poland or Ukraine depend on exports. Exports are an indicator of success. Ukraine is already an open economy. It is important to analyze what must be done to increase exports, and quotas are not the biggest obstacle as far as we know. Adaptation to the norms of the European community must be accelerated so that nothing impedes growth. Besides, the fact that exports are increasing in other markets but not in Russia is good economic policy. It strengthens the independence of Ukraine.

In Ukraine politicians who believe that the IMF wants to turn Ukraine into a raw materials appendage of the West have long been successful.

This is typical of the populists in Latin America and in general of all the anti-capitalists. It’s all a myth of course. I will talk of our experience. We had a program that coincided with the recommendations of the IMF: stabilization of the budget, liberalization of the economy and so on. The IMF approaches the questions of credit as a partner and does not impose anything. It goes something like this: all right, we’re giving you money, but we must be sure that you will return the money. You agree that it is very normal but for this you must build an economy that will grow. And if there is no growth, then there is no money either. The IMF has vast experience is stabilizing economies. But for the populists, this is a favorite theme of course.  This is why populism is dangerous, the populists take the simplest way, delaying necessary reforms for the sake of short-term political and personal gains.

Before the interview we asked one of the ministers of the new government of Volodymyr Groisman to prepare questions for you. He supports compliance with the recommendations of the IMF but says that if  everything is carried out point by point,the power will go to the populists in the next election. What is the solution?

You must always compare. Your minister did not do it. Let’s imagine that Ukraine does not stabilize its budget, does not liberalize the economy, does not remove monopolies, does not carry out reforms of the oil and gas sector. Will this be better for the country? No, it will only be worse. You should always compare to the alternative. Of course there are risks.

The possibility of populists coming to power is a risk.

If there are no reforms, the situation in the country will only worsen.  And this, believe me, is what the populists really want the most — the lack of reforms. It is this very lack of reforms that provides the basis for the populists, that opens new opportunities for endless criticism.

This is why I say that Ukraine needs fast, comprehensive reforms. Comprehensive ones! The chances for success are then much higher than postponing reforms. If you postpone reforms you have no chance for success whatsoever. At the same time, it is important to improve communication with society. It is normal that most  people do not have much information about the economy of the country. Well, how many people in Ukraine know that when it comes to the level of state budget spending, Ukraine is one of the leaders? Given the standard of living, this is a real global record — it is even worse that in Brazil, where there is an economic disaster now.

You are known as a supporter of limited government. In your view, what percentage of GDP in Ukraine should be redistributed through the budget? What percentage is optimal for the economy?

First of all, we must recognize that economic growth is the most important factor for reducing poverty. For this you need stabilization. Without the stabilization of the budget there will be no growth. The acceleration of reforms will allow for the restructuring of the state, so there is less corruption, less bureaucracy, equal opportunities, absence of privileges, absence of monopolies. Then there will be loans for this program. Then private capital will come. And only through economic growth will it be possible to reduce poverty. The problem in Ukraine is that up to 2014 there were few comprehensive reforms and many social expenditures. That is just a dead end. It is necessary to get out of it.

What percentage of GDP is redistributed? 20%, 40%?

You must start with the main goal in mind. Figures without a goal represent central planning, state planning and socialism. Look at the examples of accelerated growth in China. It is not an ideal democracy, of course. But they have accelerated the growth. When Beijing began to move away from socialism by taking the path of liberalization, social spending in China was close to 30% of  GDP. In Ukraine it is close to 40%. Thanks to accelerated economic growth, the social spending in China is now less than 20%. Thanks to economic growth, millions of people have the opportunity for a better life. But social policy in the absence of economic growth is a social catastrophe.

 In your opinion, should taxes be reduced in Ukraine? and how would you rate our tax system — liberal or repressive?

You cannot cut taxes without cutting expenses. The main tax reform is the reduction of spending through reforms. The reduction of taxes must run parallel to economic growth and the reduction of spending. You cannot simply decide to reduce taxes — you will create a budgetary catastrophe for the state. This would be very dangerous. I do not see any chances for success in such a policy.

Do you know about such concepts as “black cash” and bogus companies? It is a very common business practice in Ukraine.

Please explain

It has to do with the illegal transfer of expenses into cash and the avoidance of paying taxes. (black cash tax evasion — Ed.). The current rate (with tax evasion) in Ukraine averages 12%.  At the same time, the official tax rate is more than 40%.

I understand what you’re saying . You are referring to the informal side. Well you need to analyze the main reason why many business people prefer such a solution. Once you establish the real causes of this situation you have to remove them to enable legalization.

But this will not be enough. It is not a substitute for spending reforms, especially in the pension system. You have many poor pensioners because Ukraine is poor. Economic growth has not been secured. When that happens through reforms, it will become possible to improve the situation of the pensioners. I know there is this myth in Ukraine that the most important thing is for people to come out of the gray economy. This is very important but it is not enough.

Economic growth is closely linked to economic freedom. What must be done immediately? What are the key steps?

Eliminate unnecessary regulation and the opportunities for corruption. They are linked. You have a business ombudsman. I’d like to meet him and learn his analysis of the situation. But simply to bring the economy out of the shadows is not enough. That is a myth.

Do you have internal deadlines for assessing your work in Ukraine? If you do not see any results in a year, if people do not listen to you, what will you do?

I wouldn’t want to discuss this publicly. But since you have asked, I can assure you that I do not give up that easily when it comes to really important things, and Ukraine is, without a doubt, a very important country for all of Europe. Believe me, I am interested in helping the reforms in Ukraine. Of course, I really like Kyiv, it is a very beautiful city, but I’m not here to admire its beauty but to help bring about real changes in Ukraine.

The Polish zloty has been one of the most stable currencies in  Eastern Europe for the past 10 years. The Ukrainian hryvnia, obviously, is one of the least stable.  What is the secret of the zloty’s stability?

Proper economic policy in the state budget. Well, we had it much easier because if our exports had suffered such a blow as happened to you because of the blockade by Russia, then we could have also had the drastic depreciation of the zloty. Therefore, it was not only the difference in economic policy that played a role, but the economic shock factors for Ukraine from the aggressive actions of the Russian government. The recipe for Ukraine is accelerated reform. That is the only thing that can return stability and strengthen the Ukrainian currency.

There are foreign exchange restriction in Ukraine on the purchase and withdrawal of currency. Should they be cancelled?

I would not want to defend such actions under the conditions of what Russia is doing against Ukraine –the situation in Ukraine would be even worse without this restriction.  But, again, we go back to the necessity of accelerating reforms because everything begins with that, including the natural attraction of private capital in foreign currency after deep and comprehensive reforms.

In the current economic circumstance, how likely is it that the government will succeed in finding good investors for the state enterprises that are being planned for sale — OPP (Odesa Port Plant), Centrenergo? Will someone come here when there are so many shocking factors in the country?

When we began to work in Poland there was no capital at all. Nobody believed that Poland would come out of the economic catastrophe that followed socialism. We were introducing radical reforms. The first year there was not much inflow of capital. Everybody waited to see what would happen to us next: will we survive or not.  But when we stabilized and it turned out that Poland was growing, the capital arrived. Thus reforms and economic growth are the key to success. Only that will bring capital.

Is Polish capital interested in Ukraine?

Polish capital is the same as in any other country — it looks at results. Our team will do everything possible to make that happen.

In Ukraine many people believe that reforms mean higher prices and cuts in benefits. And subsidies in Ukraine are given to the oligarchs and the poor. What about the middle class?

Monopolies must be abolished. When it comes to social policy, it is not only the poor. One example of social policy for the rich: if you reduce  prices for heat, who gains more — the poor person with a tiny building or the rich one with a palace? The rich one gets ten times more. It’s a very good thing that these privileges for the rich have now been removed and that the poor have their own system of compensation.

There are two systems: Russian and Ukrainian. If the two countries continue to move as they do now, one will continue to move along the totalitarian path and the second on the path of reform. What will Russia and Ukraine look like in five years?

If Ukraine becomes stronger in reforming as a limited state, it will steadily accelerate its economic growth. If there are no reforms in Russia, and the political interference in the economy continues and the economy remains limited to the export of raw materials, then I don’t see any possibility for growth.

What kind of advice would you give the new government based on the mistakes of the previous one?

The government of Arseniy Yatseniuk accomplished a lot. I know from personal experience how difficult it is to solve the types of challenges that the previous government faced. It is very important to raise the level of political culture in Ukraine. There should be fewer insults and aggression. I’m trying to work from that kind of position with all the democratic politicians in Ukraine, including with the new government. Our key to success is the program and its practical application. This requires consolidation.

 Your political biography indicates that a reformer should sacrifice his rating and political future. Do you see this readiness in the current political leaders in Ukraine?

A reformer should not sacrifice but should be ready to do so if necessary. Reforms certainly present the risk of becoming a victim. But if there are no reforms, the politician will definitely lose.

You lost your next election after the reforms.

You know all those who were  in government during the country’s critical period lost. If you’re carrying out reforms there are many groups who are against it. And if you do nothing everything is against you

In Poland, the economic conditions improved after the reforms. As a result, I returned to government. I was elected in the most troubled region of the country, where there were many miners. As a liberal, I won as the candidate from the trade unions (in 1997 during elections to the Sejm for the parliamentary seat in Silesia —  Ed.).

And today I am one of the most popular former politicians in Poland (he laughs).

Translated by: Anna Mostovych
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