Ukraine’s Toughest Reform Yet: 153rd mBank-CASE Seminar
Unlike in its CEE neighbors, in Ukraine the reform path has been jagged and inconsistent, reflecting the country’s political cycle of prolonged periods of stagnation interrupted by popular revolutions. Since the 2014 Euromaidan Revolution, the country seems to be on the right track, with a number of important economic reforms already under its belt. But more challenges lie ahead. Ukraine is still one of the most corrupt countries in the world, its rule of law is weak, and the civic and economic rights of the citizens, including property rights, remain feeble. These systemic challenges have been the subject of the 153rd mBank‑CASE Seminar held on November 9th, during which Professor Anders Åslund presented his paper Will Ukraine Be Able to Establish Real Property Rights?
Professor Anders Åslund, the longstanding Chairman of the CASE Advisory Council and a Senior Fellow at the Atlantic Council, enumerated the crucial reforms that have been implemented in Ukraine since 2014. Notably, mass energy subsidies have been removed, bringing an end to energy arbitrage: in 2013, the industry had been paying $400 per 1,000 cubic meters of natural gas, while households, owing to state intervention, had been able to get it for as little as $50. But the real benefactors of the dual price system had been well‑connected traders, who would buy the gas cheap and sell it expensive, warping a system that cost the country 8% of the GDP (2014). The abolition of the energy subsidies helped to consolidate public finance. In total, the expenditures were revised down from 53% of GDP in 2014 to 40% to GDP in 2016, with many expenses identified as cases of embezzlement and discarded. Moreover, the spending on pensions was brought down from 17% of GDP in 2013 to an estimated 11% of GDP in 2016. With the reintroduction of the flat 18% PIT rate, reduction of the payroll tax from 45% to 22%, and a streamlining of VAT refunds, the tax system has been significantly overhauled, raising hopes for increased tax compliance in an economy that is still largely in the shadows. Finally, in a campaign engineered by Central Bank’s Governor Valeria Hontareva, the banking sector was cleansed of banks whose anonymous owners lived off Central Bank loans. As a result, half of the 180 Ukrainian banks, including Privatbank, were closed in the years 2014‑2017.
While the economic reforms have been relatively uncomplicated (which is far from saying that they were easy) and almost immediately effective, the institutional reforms, due to the inbred inertia of existing arrangements, are far less straightforward and may take generations to bring full effect. For example, the only country in the post-Soviet sphere that can be said to have successfully handled corruption is Georgia, following President Saakashvili’s efforts. In contrast, corruption remains the number one problem in Ukraine, as testified by the country’s distant 131st rank in Transparency International’s Corruption Perceptions Index 2016. Corruption among judges is common rather than exceptional: 16% of them preferred to resign from post rather than declare their assets in late 2016, knowing that they could not conceal their illegal sources. Prosecutors’ habits are similar, and similarly destructive: prosecutors have been known for closing or delaying cases, and even for allowing suspects to leave the country – all in exchange for suitable compensation. Together with some other relics of the exploitive state, these practices are what Daron Acemoğlu dubs extractive institutions, which harm the incipient property rights of Ukrainian citizens.
The economic reforms implemented in Ukraine since 2014 have been absolutely necessary. However, they are on their own insufficient. Markets and transactions are anchored in an institutional setup and depend on it for effectiveness. For example, whether a company will or will not commit to investment depends on its risk assessment, of which legal certainty and risk of expropriation are the crucial components. Even transactions as simple as a deposit of savings or a sale of supplies rely on the state for enforcement via independent judiciary in a process that is fair and free from corruption. With the institutions that back them, contracts become a powerful tool of deal‑making – flexible, certain, and easy-to-use. Without them, they are inconsequential pieces of paper, much like banknotes of a careless central bank.
The reform in Ukraine, like in every post-Communist country, is about the state relinquishing feigned economic security and providing genuine institutional security instead. The first has been largely attained. The second is Ukraine’s toughest reform yet.
