What Ukraine Needs Now: An Economy


By Allen Jacobs

Photo by AFP/ Getty Images

Editorial: The Jacobs family is well-known in Russian-Ukrainian Dallas. Alena Jacobs and son Alex are dancers in Zorya, Ukrainian folk dance ensemble. She is an expert in Russian and English teacher for beginners. Alena was born in Donetsk and worked in Kharkov, Ukraine. Her husband, Allen, is a Director of Berkley Research Group, an international economic consulting firm, and he has been to Ukraine many times. He has taught economics on the faculty of M.I.T., Harvard, and the University of Texas at Austin.

With the removal of the president, Ukraine enters uncharted territory again. Both the west and Russia eye this country that culturally and ethnically has a foot in each. Russia wishes to control Ukraine or make it part of Russia: ports on the Black Sea in Crimea, a route for selling gas through Ukraine to Western Europe, a mercantilist control of Ukrainian industry, and a traditional buffer for “threats” from the west. Many in eastern Ukraine would be fine with that and a separation of Ukraine into halves east and west is a an oft-plotted development that would be the next best thing for Russia. The west wants a stable, independent Ukraine not run by Russia. What’s best for Ukraine? Is EU the answer?

Kiev was a European city over a thousand years ago. Even today, Ukraine has produced Nobel prize winners and achievements in every field and cultural realm. However, Ukraine has suffered innumerable foreign invasions – three times in the last 100 years. Ukraine as a free and independent country seems more like an episodic occurrence every few generations. Ukraine was once a constitutional republic (50 years before the U.S.). However, 70 years of Soviet domination has brought starvation, stagnation, and left a legacy of corrupt commercial activity and a culture of cynicism toward business and economic activity.

Today, corruption is still the norm – dominated by oligarchs/mobsters from the Donetsk area in Eastern Ukraine who in alliance with Russia and Russian-leaning politicians in the East managed to get their man Yanukovych elected even while he promised to bring Ukraine into the European Union. Although his overt switch to Russia instigated the uprising three months ago. It was also driven by shopkeepers, taxi drivers, and small business people in rebellion at the oligarch-mobsters.

Corporate takeovers in Ukraine have been done at the point of a machine gun together with a corrupt judge sanctifying the change in control. University grades and sometimes diplomas are routinely sold. A drive across the country is not complete without the friendly stop and tip to a policeman. Visitors immediately see the astronomically high hotel rates at the few hotels because new hotels are blocked by existing owners – a multitude of citizens renting out furnished condos by night makes up most of what would be the hotel industry. Ukrainians have years of food stores hidden deep in the ground or in locked cellars — ready for the next Russian invasion or economic collapse. The oligarch-mobsters take their money out of the country, buying shopping malls in the west and luxury homes in London. As a result, the legal economy has grown slowly in Ukraine. The average wage even for professionals is $500 per month. Doctors, lawyers, university professors typically make less than the minimum wage in the U.S.

Despite these ravages, Ukrainians remain an astonishingly peaceful society — even the eastern Ukrainians speak Russian with a melodic accent that reflects the gentleness of their manners.

What’s best for Ukraine? Competing loan packages from the West and Russia merely defer what is needed and provide more corrupt rents to be obtained by the rulers of Ukraine. Instead, what’s needed is a vibrant and growing private sector of capitalism that trades with all the world. No top down regulation or trade control by either Russia or western governments will create that. What’s needed is an absence of violence and an absence of control. Ukraine should be allowed to be a free trade zone between east and west. The choice of whether to trade with Europe, the rest of the world, or Russia is a false choice – a mercantilist question that does not serve Ukrainian economic development. Five freedoms are key:

1. Freedom from violence. There is no economic development without an absence of violence. A big step toward absence of violence was accomplished last week, when the government attempt to attack protestors backfired and Putin declined to send troops and tanks to take over eastern Ukraine. A major accomplishment may just be the big powers preventing violence in Ukraine. A standoff of big powers of the west and Russia may be just what Ukraine needs to be protected from violence without needing to fight a battle of its own.

2. Freedom in legal commercial activity. Allowing contracts, asset ownership, financial securities, and business transactions to be governed by international arbitration or other chosen venues and upheld by Ukrainian courts and police would free economic development from the mire of corruption and allow an entrepreneurial class to emerge. Private wealth needs to emerge without being beholden to the political whims of local corruption, western interests, or eastern interests. If this happens, then there will be ample foreign investment without the mediation of government programs; and those making money in Ukraine will be less in need of quickly moving their profits to safer political environments. The practices of successful city-states of the past and more recent examples of Hong Kong and Singapore can be used. The west can play a major role in helping this happen and preventing any political-business alliances in Ukraine from undermining this.

3. Free trade. Trade with Russia, trade with Europe, trade with the rest of the world. Even if most trading is with countries that attempt to exercise political control over trade, Ukraine is better off with free trade. Around the world, tariffs and quotas with selective exceptions or graft for favored individuals or groups are a time-honored way of generating large profits at the expense of the economy. Ukraine is no exception. The west can help by removing its import barriers, but even if it doesn’t, Ukraine is better off without its own barriers to trade.

4. Currency freedom. Contracts should be denominated in whatever currency that parties desire. Fortunately for Ukraine, they have enjoyed relative currency freedom for the last 20 years with the Grivna freely traded to and from Euros, Dollars, and Rubles on every street corner. Otherwise, the the current economic malaise and political troubles would have been far worse. Currency freedom means free trade in capital – essential for economic development.

5. Freeing energy development. Ukraine has adequate energy resources including extensive shale gas, enough for its own needs and potentially for export. However, Ukraine gets almost all its energy as natural gas imported from Russia – for which it now owes substantial debts. The technology for developing these reserves is wholly resident in U.S. companies. Ideally, with natural gas prices high in Europe at present, Ukraine should auction off development and mineral rights to private holders each year (enabling it to pay Russia the debt it owes). A private system of mineral rights such as those enjoyed in Canada and the U.S. seems unlikely as even the EU has a state-encumbered system of mineral extraction control which preventing energy resource development. Instead, the government should nevertheless promote development of hydrocarbons through auctions and royalty-style taxes, thus providing substantial revenue for the central government and legal property rights in development. The enormous pipes constructed to carry Russian gas west through Ukraine could also carry Ukrainian gas to Western Europe in competition with Russian sales.

Citizen involvement in government needs time to evolve from graft and mass protests to one of courts and local government under a constitution system of laws. The European Union does not automatically bring good government. Time is needed for the generation of entrepreneurial effort to replace attitudes of victimization and blaming the government. Economic activity and economic life is an alternative to politics, cronyism, protests, and corruption, but it may take a generation.

Joining the EU may help in some of these steps, but does nothing by itself. The EU’s interest is not free trade for Ukraine. EU mercantilism and central bureaucratic control is almost as bad as Russia’s. If Ukraine follows the five steps, then within a generation it will enjoy a standard of living that will have moved from the lowest to one of the highest in Europe – the essential pillar in building a stable self-governing country. Ironically, this would be what’s best for Europe and the U.S. Russia may have a hard time seeing how to achieve its interests without control, but this outcome would actually benefit Russia too in the long run.

Подпись под фото: What’s best for Ukraine?

реклама Роксоланы (на англ)

Александра Морель (на англ)

Виктор Корби

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