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Prominent Slovak economist about why & how Ukraine differs from Poland & Slovakia

Ivan Mikloš, head of the strategic advisory group on reform support in Ukraine, former Deputy Prime Minister for Economy and Minister of Finance of Slovakia
Prominent Slovak economist about why & how Ukraine differs from Poland & Slovakia
He’s been called “the best finance minister in the world”. He’s worked in four Slovak governments and in a relatively short time spearheaded his country into the “Euro zone”.

RFE’RL’s interview with Ivan Mikloš, head of the strategic advisory group on reform support in Ukraine, former Deputy Prime Minister for Economy and Minister of Finance of Slovakia.

– Ukraine is a country that’s wasting its potential… and it has enormous potential! For example, in 1992, Deutsche Bank analyzed and compared the former Soviet republics, assessing which ones had the best chance to grow rapidly and become successful. Ukraine ranked first among all the post-Soviet states. It had better chances than the Baltic States. However, Ukraine hasn’t taken advantage of this potential. Why? Because it hasn’t carried out reforms and hasn’t moved any closer to European integration.

The countries that reformed and integrated into the EU (these processes are related: a country needs to bring in certain reforms before entering the EU), namely, the Central European countries and the Baltic States, are now at a much higher level than Ukraine.

Let’s compare Ukraine and Slovakia. When Ukraine declared its independence in 1991 and Slovakia emerged as an independent country in 1992, the economic indicators and gross domestic product per capita of both countries were at the same level. At that time, the economic indicators of Ukraine, Slovakia and Poland stood at almost the same level. Today, the difference is huge.

As for purchasing power, it’s four times higher in Slovakia, but nominally (in dollars) – it’s seven times more per capita than in Ukraine.

But, people are the same everywhere. I don’t see any difference between Ukrainians and Slovaks when it comes to values, education, and job performance.

Therefore, it’s quite obvious that, if Ukraine launches progressive reforms and moves actively towards European integration, it will be able to use its untapped potential and initiate a period of stable economic growth. This, in turn, will bring what’s most important for the population – better living standards, higher wages and a more comfortable lifestyle.

– Mr. Mikloš, you say that you don’t see any difference between Ukrainians and Slovaks or in each country’s human potential, but in the so-called political elite? What role does the government play in fulfilling a country’s potential?

– Reforms and integration are two processes that need to be carefully managed. These processes need to be administered by changing governments. When Ukraine became independent, the first president and the Ukrainian political elite, as you call it, said: first, we’ll build an independent state, and reforms will be carried out later, and they won’t be as tough and demanding as in Czechoslovakia or Poland. They stated that they wouldn’t implement such strong reforms as it would hurt the people. However, as these past decades have shown, the opposite is true.

Reforms, which at first appeared to be extremely tough, brought stability, order and investments, and eventually led to European integration and a sustainable economic development.

In Ukraine, the political elite focused elsewhere and we all know what it led to… huge inflation in the 1990s, civil turmoil, no operational laws, and widespread corruption.

The so-called “Red directors” of Ukraine – directors of large state-owned Soviet companies – took advantage of this disorder, and actually created their own private companies on the basis of former state-owned enterprises.

These people became extremely influential and extremely wealthy. And then, these wealthy individuals, these oligarchs, abusing their economic and political power, began to oppose reforms.

Why? Because, in this unreformed environment, they are able to use the whole potential of the country in their own interests, i.e. for themselves, against the country and against the people.

This is one of the reasons why it’s so difficult to carry out reforms in Ukraine, more difficult than in Slovakia. There are people in Ukraine who are very rich and influential, who’ve become very rich and influential thanks to blocking of reforms and who simply don’t want change for the better.

– Euromaidan activists demanded change, a decent life and European integration. Since 2014, Ukrainian politicians haven’t stopped referring to the word “reforms”. Many institutions have been set up to promote reforms, including the advisory group that you preside. But, have there been any concrete results?

– We can say that, after Euromaidan and for the first time in Ukraine’s history, systemic reforms towards an effective market economy and future EU membership have begun. On the other hand, some people say that more could have been done, and that much more needs to be done. Despite the fact that things are moving, Ukraine hasn’t yet passed the “point of no return”.

Yes, there have been many opportunities. There are countries that have less potential, but have achieved a lot in a much shorter period of time. Slovakia is one. There are countries that did everything gradually, changed very slowly, but continued in the right direction, and became successful… Romania, Bulgaria, and Poland.

In Poland, there was a time when there were no reforms, there was a great deal of corruption, there were no investments. And then, suddenly, a lot of reforms were launched in a very short period of time. Why? Because it became possible politically. Reforms are always more of a political challenge than a technical one. From a technical point of view, we know what to do.

– So, what’s been achieved under these political conditions?

– A lot’s been done in some sectors in Ukraine in the past four years. For example, the most important achievement is macroeconomic stabilization.

People don’t understand what it means and why it’s so important. But, it really is!

Public finances have been stabilized and the deficit’s been reduced. Inflation’s under control. A floating exchange rate was introduced (the currency’s value is allowed to fluctuate in response to foreign- exchange market mechanisms-Ed.), and this results in some stability due to minor fluctuations. The banking sector has been cleaned up. Many corrupt banks that stole money were closed down. Ukraine has a professional independent National Bank, which controls the situation in the banking sector and makes sure that such problems don’t appear again.

Then, there’s the pension reform. It’s an important and very sensitive reform. Take a look at what’s currently happening in Russia. Pension reform is a very sensitive issue in any country. And, the way it was implemented in Ukraine is a very good example.

There’s more… medical reforms have been launched, some reforms have been initiated in the education sector; deregulation is a success.

– Where has there been no progress?

– The first and most important thing is to establish the rule of law and protection of property rights. Also, the fight against corruption. There’s been little progress in fighting corruption.

There’s hardly been any progress in privatization. But, we hope that this will soon change; a new law will be introduced and the process will begin. But, we’ve lost four precious years!

Then, there’s land reform. Unfortunately, the land reform bill was not approved; the moratorium on land sales was not canceled.

These reforms are crucial for future investments. Without a large inflow of investments – private, public, foreign – the Ukrainian economy will not grow! There aren’t many investments yet because we’ve failed to move forward in these areas.

– And what about the fight against corruption?

– I’ll say it right now. I don’t agree that no headway’s been made in fighting corruption. Some measures have been taken, but let’s take a look where. There are three main fields in the fight against corruption. There is transparency so that everything possible is open to the public. There’s progress here. Ukraine has laws on free access to information; there are many private institutions that work openly and transparently.

Then, there’s the energy sector where reforms were really needed to reduce the opportunities for corruption. A lot’s been done here. Before Euromaidan, there was a huge difference in prices for the mainstream population, for industry and for export. Only 12% – price for the population, and 100% – market price for industry and export. Billions of dollars were stolen. How? They bought gas at low prices, supposedly for the people, and then sold the same gas to industries or for export at a much higher price and earned billions of dollars annually. Someone had to compensate Naftogaz, and the burden fell on the taxpayers. That’s the main reason for such a huge deficit. However, this source for massive corruption disappeared in April 2016 when energy prices for the public sector were raised to the market level.

Did people suffer? People who can’t pay receive a state subsidy so they hardly noticed these higher prices.

Let’s look at the banking system. 80 banks were closed and PryvatBank was nationalized. All these banks were sources of enormous fraud and corruption, whereby money was stolen from the state, that is, from taxpayers.

An independent Swiss audit showed that 5.5 billion dollars were stolen from PryvatBank over ten years! In December 2016, the bank was nationalized by the government of Ukraine to protect its 20 million clients and to preserve “financial stability in the country”.

Third – the value added tax (VAT). Large-scale corruption here. Today, we have an automated electronic system.

Fourth – public procurement. The ProZorro system* also greatly reduced corruption.

(*ProZorro (from Ukrainian “Прозоро” – transparent, clear) is a public e-procurement system and a symbol of dramatic reform of government procurement in Ukraine. ProZorro is a result of collaboration between the Ukrainian government, the business sector, and civil society. This system was developed by a reputable international anti-corruption organization – Transparency International Ukraine – with the help of volunteers, NGOs, the business community and state bodies, the WNISEF fund, the EBRD, and other partners-Ed.)

But, there are two branches where corruption is still widespread – state-owned enterprises, and smuggling operations with customs violations. There’s a lot to be done here.

We’ve also made little headway in punishing people for corruption, and in applying the rule of law. Although Ukraine has a new Supreme Court and an Anti-Corruption Court, while NABU (National Anti-Corruption Bureau of Ukraine) is fully operational, not enough progress has been made in the Prosecutor’s Office, the SBU and the police.

It’s important to implement reforms in these areas so that the competence of these institutions is not allowed to extend to economic crimes. In fact, a new financial police force should be set up to investigate economic crimes. Today, one of the main sources for large-scale corruption is that these institutions, i.e. the Prosecutor’s Office, the SBU and the police abuse their powers and authority for personal enrichment.

– During the years you’ve spent working in Ukraine, do you think that the current government really wants to implement reforms quickly and give Ukrainians a better standard of living? Do they heed your advice?

– I’ve already answered this question indirectly. I’ll say it again… Ukraine is changing and moving in the right direction. This would be impossible without the will and desire of certain people. However, it’s obvious that the political elite is composed of different people with different interests. That’s the case in all countries.

I work primarily with the Prime Minister and some ministers. I can say that Prime Minister Groysman fights for reforms and listens to my advice.

It’s not 100%, but Groysman understands why reforms are needed and wants to push them through. When we, as advisers, have the opportunity to improve or speed things up, this is primarily thanks to him and some other ministers who are eager to implement reforms.

– What indicators reflect the effectiveness of your group of advisers?

– We specialize in several branches: public finances (I’ve already mentioned this), macro-stabilization, and in reforming state-owned enterprises and promoting special privatization.

We’re working on a new bill; we’ve developed new procedures to accelerate the recruitment process for new independent members of supervisory boards at state-owned enterprises. We’re also seeking advisers for the privatization of these enterprises.

We also work in the energy sector. We’ve helped with the implementation of the Energy Efficiency Fund. We also take part in talks with the IMF, the European Commission and the World Bank. We’ve also worked on land reform proposals. Our experts are involved in all of these industries, which we consider to be the most important. Our group includes Ukrainian experts, Slovakian experts, who’ve worked on reforms in Slovakia, and Polish experts.

– We’ve heard that you were offered the position of Minister of Finance of Ukraine or another important post in the government?

– There was an opportunity in 2016, when Volodymyr Groysman’s government started negotiating. But, from the very beginning, I said that Ukraine has its own experts and professionals, that Ukrainians should be in the Ukrainian government. So, I agreed that I’d take on the role of an adviser.

I was minister in four Slovak governments. I have a lot of experience. But, I also know from experience that being a minister is difficult in any country. One of the most important things is communication and dialogue. We must speak with the people, explain and fight for reforms, and fight against populists. I don’t think that a foreigner would be able to do that as effectively as a Ukrainian. And, I don’t speak Ukrainian.

– In your opinion, what’s going to happen in Ukraine in the coming years?

– Actually, everything’s quite simple. No substantial reforms have been implemented, so this is why Ukraine’s potential hasn’t been fully exploited. Reforms are taking place, but there’s still a lot to be done, and progress is very slow.

If Ukraine continues to reform, if it accelerates reforms, it can truly prosper and become a successful and forward-looking country.

I’ll give you an example. Today, growth is at 3.6%. That’s better than a few years ago, but still not enough.

Ukraine has the possibility to grow steadily at about 6-7% annually, but only if the reform process and European integration continue.

Populists are very dangerous for Ukraine and for the country’s successful future. If populists come to power – populists that fight against change and reforms, there will be no social or economic growth, no investments, and no success.

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