Ukraine: Don’t repeat past mistakes
The events in Ukraine have now made effective external support for successful economic and political reform there even more crucial. The world community is rising to the occasion, with concrete indications of aid coming not just from the International Monetary Fund and other international financial institutions but also the United States, the European Union and the G20.
At one level, the Ukraine situation is unique — particularly the geopolitical aspects associated with Russia’s presence in Crimea and the issues raised by Ukraine’s strategically sensitive location between Russia and Europe.
At a broader level, the world community has seen many examples over the last generation where an illegitimate, or at least highly problematic, government was brought down and the world community sought to support economic reform and a new, presumably more democratic and legitimate one. Think of the transitions after the Berlin Wall fell or the Arab Spring.
As a broad generalization, the support efforts have been constructive but the results have often fallen short of the global community’s aspirations. The Marshall Plan metaphor has been invoked close to a dozen times in the last quarter century. None was as successful as the original. It is true that well-functioning institutions cannot be imposed from the outside — countries and their peoples shape their own destinies. But experience does provide important lessons for the design of support programs.
Five lessons stand out.
First, immediate impact is essential. New governments will not last unless they deliver results that are felt on the ground. Conditions on assistance need to recognize political as well as economic reality. Resources must be delivered in a front-loaded way, where their impact is immediately visible.
For example, strengthening safety net programs and support for new businesses need to lead — not lag — the removal of subsidies. Too often the international community sets economically rational conditions that are more than the political process can bear, then fails to move aid and blames the country for its bad policies. This is surely a time for political concerns to trump technocrats’ fears.
Second, avoid “Potemkin money.” A combination of media excitement, recipients’ desire to maximize support and donors’ desire to appear visionary usually leads to the announcement of huge assistance packages, based on indiscriminate totaling of all project flows of all kinds. The result is disappointment followed by disillusionment, as recipients realize that not all assistance can materialize quickly or meet urgent local needs.
Third, be realistic about debts. Ukraine’s debt-income ratio is relatively low compared to the crisis countries of the European periphery, so encouraging full debt service may have benefits in terms of financial stability and maintaining existing fund flows that make it worthwhile. However, in light of the fact that private creditors of Ukraine have for years received risk premiums of 500 basis points or more suggests careful consideration should be given to rescheduling or restructuring Ukraine’s debts.
As with Poland after the Berlin Wall fell in 1989, debt relief can provide a strong signal of political support. In working through past debts, though, the international community needs to be careful about setting the stage for future problems by relying on debt finance rather than direct grants for projects where the benefits are non-pecuniary or the costs continuing.
Fourth, honest management is as critical as prudent policy. Traditionally, international financial institutions’ focus has been on imposing conditions that go to the quality of policy. It is now understood, however, that the diversion and theft of public resources is a major source of poor economic performance. The international community should do everything it can to recover ill-gotten gains from former Ukrainian officials and put in place procedures that will prevent future fund diversions. The benefits here are both significant in narrow economic terms and salient in political terms.
Fifth, countries need to pursue broad polices in a way that benefits Ukraine. For example, Congress needs to bring the United States along with the rest of the world and approve full IMF funding if Washington is to maintain its leadership role with respect to financial crises. Ukraine’s economic strength and autonomy would also improve if the United States were to permit natural gas and crude oil exports.
Ukraine is far closer to Europe than to America, so it has an even greater stake in Europe prospering and becoming a growing market for its exports. The most natural north star for Ukrainian economic reformers is the possiblity of an ever closer partnership with the European Union.
Respect for these principles does not insure success. But failure to heed them almost insures failure. Given what is at stake with Russia in Crimea, the stakes in what we are trying to accomplish are immense.
PHOTOS: Pro-Russian demonstrators take part in a rally in the Crimean town of Yevpatoria March 5, 2014. Russia rebuffed Western demands to withdraw forces in Ukraine’s Crimea region to their bases on Wednesday amid a day of high-stakes diplomacy in Paris aimed at easing tensions over Ukraine and averting the risk of war. REUTERS/Maks Levin
An armed man, believed to be a Russian soldier, stands outside the civilian port in the Crimean town of Kerch March 3, 2014. Russia has started a build-up of armoured vehicles on the Russian side of a narrow stretch of water between Russia and the Ukrainian region of Crimea, Ukrainian border guards said on Monday. The words read: “Port Crimea”. REUTERS/Thomas Peter