Ukraine: The Broken Economic Model, Who Pays for It, and How to Fix It?

June 27, 2015 • Articles • Views: 850

Text by Agne Dovydaityte

When you owe a bank $1 million and cannot give it back, you have a problem. When you owe a bank $1 billion and cannot give it back, the one in trouble is the bank. Stressing this tragically humorous idea behind Ukraine’s economic status, Andrei Kirilenko, Professor of the Practice of Finance, MIT Sloan School of Management, started the roundtable discussion hosted by the Legatum Institute’s Transitions Forum.

The discussion was moderated by Transitions Forum director and author Anne Applebaum, and also attracted experts such as Peter Pomerantsev (Senior Fellow to the Transitions Forum) and Judith Gough (upcoming ambassador to Ukraine).

Sadly, at the moment Ukraine is facing not just political-militaristic challenges and threats from Russia, but also economic difficulties. Huge debt, influence of the country’s biggest creditor, the International Monetary Fund (IMF), on its macroeconomic policy, corruption, mistakes made by former and current governments – each of these hardships poses an existential threat to the country. Vague attempts at hypothesising about the future raises a lot of questions in Ukraine and in the West. Is this broken economy model, illustrated by Kirilenko by a metaphor of a broken old Soviet truck, worth trying to fix? Which parts of it should be strengthened and which ones should be replaced or rejected, in case we fix that truck? Finally, where are we travelling?

Ukraine needs not just some ‘transport’ to move forward but also accountable and responsible drivers to drive it West.

In the discussion Kirilenko held quite a critical position. ‘It seems like something is happening, but not the reforms that should be done. Moreover, it’s still empowering the same group of people,’ he said.

After Applebaum asked for a specific example of how things could change, Kirilenko said that he ‘would like to see this government go after the elections’. ‘I think this government has done what it could do. I’d like to see a change in the government,’ he said, explaining that government shouldn’t get involved in the sections where it doesn’t belong, and focus on the issues which actually should be in its spheres of interest. Long story short, less control from the government should lead to a more effective problem solving process. ‘There are some problems they can’t fix. Market competition will fix those problems,’ he explained.

He also stressed that some people in higher positions care more about their reputation than duties, which stops them from making sometimes unpopular but essential decisions, which in turn slows down the country’s development and getting out of the current stalemate.

Experimenting by appointing foreigners to top government positions is worth a risk… as there is not much left to lose. Kirilenko

The question of foreign officers in the government was raised as well. Indeed, Mikheil Saakashvili was recently appointed to be Governor of Odessa oblast, Lithuanian Aivaras Abromavicius accepted Ukrainian citizenship to be Minister of Economy and Trade, Natalie Jaresko also gained her citizenship the same year as she was appointed Minister of Finance of Ukraine. Although some of the positions are questionable, Kirilenko said that experimenting by appointing foreigners to these positions is worth a risk, as there is not much left to lose. Moreover, Ukraine’s officials need to integrate more into European background, improve their English, and engage with the discourse of multiculturalism.

Still, probably the most frequently asked question remains which sectors in Ukraine are worth reviving, where it is better to invest, and which ones are doomed. This issue is particularly important for Gough as the Ambassador to Ukraine, who is expected to advise investors on their perspectives in Ukraine. Apparently, young businesses in the country should concentrate on IT sector, then agriculture (with some exceptions like Mariupol) and small manufacturing.

Young businesses in the country should concentrate on IT sector, then agriculture (with some exceptions like Mariupol) and small manufacturing.

The discussion covered the main concerns about Ukraine’s economy. Opinions about the current government varied from advising it to resign to calling it the best one Ukraine has had so far. The question if the ‘old Soviet truck’ is still worth fixing remains a vague one, but one thing is clear: Ukraine needs not just some ‘transport’ to move forward but also accountable and responsible drivers to drive it West.

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