Ukraine: Don’t repeat past mistakes

March 10, 2014

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.

Remember, the Marshall Plan was announced without any figures or fact sheets. The goal for Ukraine should be to under-promise and over-perform in the months ahead.

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



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The Marshall Plan plan worked well, in part, because the Nazis were destroyed militarily and the war was over. Unfortunately, the most pressing issue with Ukraine is that Putin will do everything possible to further destabilize it, so that he can grab its land piece by piece, or just to swallow outright.

Posted by UauS | Report as abusive

This is an excellent article, FINALLY on what the weest can do to help Ukraine. (ras)Putin is Ukraine’s enemy number ONE, with oligarch mischief a close second.
We help Ukraine or we leave it to (ras)Putin to continue to destroy. Russia has no interest in a strong Ukraine and Ukrainians are just starting to figure that out. The west needs to open markets to Ukraine and guarantee access to those markets because we have a lot more interest in trading with a democratic Ukraine than we do Military Communist China.

Posted by UScitizentoo | Report as abusive

Having read this article ( and-imf-economic-medicine-the-looting-of -ukraine-has-begun/5372274), I have to say that I think The Ukraine is better off with Russia than the USA.

Posted by TocoToucan | Report as abusive

Everything is right. However, it should be a reason why IMS and Western donors did not do it earlier in Ukraine and other countries. Particularly, would IMS and EU provide finance to Ukraine in October or November, when Ukrainian government practically begged for the help, there would be no deaths, no revolution, and no conflict with Russia.

Most probably, there are institutional limitations on what can be done and what cannot. Would German taxpayers, who all but rebelled against a help to a close ally Greece and even to a tiny Cyprus, glad to give money to utterly corrupt and constantly disorderly Ukraine?

Posted by yurakm | Report as abusive

More of the same ole’ song and dance. If the Ukrainians knows what’s good for them, they will stay away from the IMF or they will end up like Greece or worse. Then they will lose all that fertile soil to the fraking companies (if they haven’t all ready). I hope they are contributors to breaking the G-0 plotters. That is no way to run a planet. BAD IDEA FROM THE INCEPTION.

Italy is on the right track, and can be a good roll model for Russia and Ukraine (and the rest of the world) and they are the first and came in towards the end. I am impressed at how quick they caught on and how fast they have moved. It is a good time to be Italian! L.

Posted by 2Borknot2B | Report as abusive