- Back in 1995, I taught economics at the University of Pennsylvania in Philadelphia, and did research on Eastern Europe, in particular on Ukraine. I was involved into a number of joint research projects, with several universities, including Harvard. I wished somehow “translate” my theoretical studies into practice, i.e., to do something real, something tangible, in order to help Ukraine; to help not only with words but also with deeds. Initially, my esteemed colleague, Iwan Koropetsky, Economics Professor at Temple University, of Ukrainian origin, encouraged me to do so. And then, in early spring 1996, I was contacted by Jeffrеy Sаchs who was about to begin a Harvard project on economic policy in Ukraine. Professor Sachs invited me to join his team. Thus, in June 1996, I arrived to Kyiv with a mission to set up a “Macroeconomic Policy Reform Project”. Soon my main associates became: Dr. Khwaja Sultan, who specializes in fiscal policies and public finance; Dr. David Snelbecker, who is working on economic reforms and social problems (pension reform in particular); and Alexander Pivovarsky, a doctorate candidate at Harvard, whose main interests are structural reforms in transition economies and institutional transformations. Later on, we were joined by Dimitar Mishev from Bulgaria. All other full time employees of the project have been Ukrainians. We have been assisted by several part-time consultants – from Ukraine, Russia, Poland, Bulgaria, England, and of course from the USA.
- Did you enter into any agreements with the Ukrainian government or other institutions as regards your work in Ukraine?
- Back in 1995, both the President and the Prime Minister of Ukraine invited Harvard to establish a group of experts to work in Kyiv and to assist the Ukrainian government. After the discussions, the USAID decided to sponsor this project. Our principal task had been to help Ukraine with its macroeconomic policies and reforms, with a focus on reform concepts, macroeconomic policy coordination, and improvements in policy analysis and process.
A couple of meetings with President Leonid Kuchma sealed all the above matters. In September 1996, Viktor Pynzenyk was appointed Vice-prime-minister in charge of reforms. A decision was made that we – as а macroeconomic policy group – would assist Mr. Pynzenyk who was to coordinate and supervise the activities of all agencies involved into economic policies, such as the Ministry of Economy, Ministry of Finance, State Property Fund, and others. This was the beginning. Unfortunately, the progress in coordination of economic policies and the formulation of a coherent comprehensive reform program was sluggish. It seems that, at that time, Ukraine was still not ready for fundamental market reforms.
The experience of many countries has demonstrated that reforms cannot be successful, unless there are both strong demand for them and the capacity in the government to deliver. Any reform introduced as a result of external pressures (by request of foreign donors or conditions attached to foreign funds) have not been effective. Ukraine needed more time to establish a “critical mass” for reforms. At that time, our main contribution to the reform process was not a “direct” support for reforms, as expected by the donors, but rather an “indirect” support. Together with a group of Ukrainian economists, Polish economists from CASE, and other experts, we began asking many questions concerning Ukraine’s economy and its institutions. Our goal was to stimulate debates and discussions on the “technology” of policymaking and on reform strategies. We wanted to sort out causes and symptoms, and identify short-term and long-term policy priorities. This was a time for questions rather than for answers, for thinking rather than for doing.
Mr.Pynzenyk deserves a large credit for the reform package he elaborated, with the assistance of many experts, including our team. The debates on the package were probably the most important accomplishment at that time. We helped provok fierce debates and remained not upset (just a little bit) even when their participants did not agree with us and criticized us.
It is not possible to introduce reforms by solely bureaucratic and technical means. There must be a competition in the policymaking process and in reform programs. No one should have a monopoly on being right. The successful reform needs a triple competition: intellectual (the market of ideas), political (the democratic mechanism), and economic (the market of economic factors and products). And all three are necessary.
- Today some favorable changes related to the introduction of market mechanisms in communal services and elimination of privileges have taken place. How could you evaluate government’s measures in this area?
- An important task of the market is to provide equal opportunity for all economic actors. The market sets prices for money (exchange rates, interest rates), labor (wages), land, products, etc. These prices are to express marginal scarcities. They are important signals for economic actors. They are powerful carriers of information and motivation for policymakers, investors, producers, and consumers. The competition, over time, brings prices down and brings quality up. Those who lived in the USA during the 1980s and 1990s could experience the hard work of market forces, which managed to smash prices and improve quality of many goods and services, including telephone calls (which are today about ten times cheaper than 15-20 years ago), plane tickets, many consumer goods, etc. At the same time we could also witness the high cost of distorted prices and monopolistic practices. The distortions are especially large and painful when they are actively supported by an incompetent or corrupted government. Unfortunately the recent history of Ukraine provides many examples of such expensive distortions, which are not sustainable in a longer period of time and, as a rule, lead to effects opposite to those officially pronounced by their supporters. An overvalued hryvna, skyrocketing interest rates, monopolistic practices in the automobile industry, artificially low prices of agricultural products (supported for example by an export tariff on sunflower seeds) are examples of painful distortions produced by bad economic policies.
Unfortunately, despite some improvements, there are still many measures keeping the economy away from the market. In Ukraine, one can witness a reform policy consisting of a “one-step-forward” and “one-step-back” strategy. It is hard to figure out which of these steps are longer, i.e., whether, as a result of this policy, Ukraine is moving toward the market or away from it. Recent forward steps include the quite successful struggle against demonetization of Ukrainian economy, in particular, against mutual settlements in the budget sphere, against barter and arrears. Fresh backward steps include the creation of another unrealistic budget, a new wave of tax exemptions, debt forgiveness, credit lines, and directed bank credits. The decision to float the hryvna is a good example of a forward movement. The administrative reform, in turn, is an example of a movement that is difficult to evaluate – it is forward and backward at the same time. The situation with the VAT is a good example of a backward movement. While during the last several years the VAT rate has remained at 20 percent level, the budget has been receiving less and less VAT revenue (expressed as percentage of GDP). This suggests that the number of those exempted from this tax has been systematically increasing.
- I presume you have considered the problems with small and middle business…
- We view these problems as very serious. It is the insufficient development of small and middle businesses that hampers dynamic economic growth. The discrimination against these businesses is palpable. Ukraine suffers from grave structural problems. We do not see a sector that could pull the economy out of recession. The public sector is under-regulated. The business sector is over-regulated. The existing system of privileges, taxes and regulations is friendly toward large capital-intensive enterprises and unfriendly toward small labor-intensive market-oriented enterprises. It tends to support loss makers and punish profit makers. Labor is overtaxed. Capital, land, and energy are undertaxed or even tax-free. It is cheap to misuse energy and keep buildings and land idle. At the same time, it is very expensive to gainfully employ labor. The state sector fails to generate any dividend for its owner. In 1999, despite a very low level of investment, the budgetary receipts from the dividends on all state own shares amounted to UAH 280 million, or less than 0.25 percent of GDP. The privatized sector is in the hands of “diluted” owners and insiders. The international experience shows that these two types of ownership are inefficient. The foreign sector is underdeveloped. It includes export/import-oriented enterprises and those related to foreign investments. Foreign contacts in Ukraine are not significant enough to stimulate the economy. In contrast, the revenues in Poland, Czech Republic, Hungary, and Bulgaria are coming mainly from foreign trade and services, international tourism, and foreign investments. The agriculture lacks monetized transactions and competitive markets. Policies toward agriculture are a good example of how a potentially highly profitable sector can be destroyed by bad policies. Ukraine begins importing grain and sugar! The government, through its price policy, kept depriving farmers of their incomes and, at the same time, kept providing subsidies to help this sector. As a result of these take-and-give policies, farmers had to learn how to remain (at least officially) unprofitable rather than how to become more productive and competitive.
Overall, I see no sector that can lead Ukraine out of the crisis. Worse, I see no concept as to which sector can do this job and no strategy of active support for such a sector sector. Small business is too small and too weak to defend itself against the abuses of tax collectors and central and local administrations.
The GDP per capita in Ukraine ($600 per capita) is higher than in many FSU countries, but below the GDP per capita for China, for Albania, and below the average for Africa. India is getting close ($450). South-East Asia, Latin America, and Central Europe are far away, with incomes several times higher than that of Ukraine. According to official statistics, ѕ of Ukrainian population live below the poverty level. Little work is done on poverty. No reliable data exists. I am not familiar with any long-term comprehensive program on poverty. No strategy how to deal with this pervasive phenomenon has been formulated.
- Who are the recipients of your materials?
- Our policy analysis materials include economic monitoring and studies of various current policy issues as well as reform concepts and initiatives. Our materials are sent to all those involved in economic policy: governmental departments, parliament committees, research institutes and experts.
- What are the prospects of the Harvard Group in Ukraine?
- Our main intellectual force is the capacity of our well-educated young Ukrainian economists. Unfortunately, this great potential is not used to the full. There is a gap between current policymaking and the educated youth. We want to continue working on capacity building by training and supporting elite economists who will determine the future of Ukraine. We are here today, but we cannot and should not stay in Ukraine permanently. We should help initiate institutions and structures that enable Ukrainian economists to formulate and implement the reforms in their country.
- Finally, we would like to know your forecast of economic development in Ukraine for the nearest future.
- We keep looking for significant changes in policies and economic activities that would bring about a long-term dynamic growth. They are still difficult to be spotted. In a recently published study of about one hundred countries Ukraine was singled out as the country with the greatest difference between its economic potential and actual performance. In economics we say that the country “is located far below its production possibilities frontier”. Ukraine must be brought much closer to its possibilities frontier. Unfortunately, despite recent respectable efforts of Ukrainian leaders, in the near future we do not see economic growth that would be significant enough to bring improvement of standards of living of Ukrainians. Much more improvements in policies are urgently needed.
As I have already mentioned, we are greatly impressed with the intellectual capacities of the young generation. Once given a chance this generation is capable of implementing good policies, improving the economy, and leading the country toward Europe. Human capital is more important than money, technology, and all other resources. In fact, while working with young Ukrainians it is hard not to be optimistic about the future of this country.