Ukraine, Reforms, and “Doing the Right Thing”

| June 2015
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I recently had the opportunity to visit several European countries under the aegis of the William Ruger Chair of the Naval War College, on a trip led by Ambassador (ret.) John Cloud, to examine efforts to aid Ukraine. Amidst discussion about European Union enlargement, the internal disputes within the EU in the run-up to the Eastern Partnership summit in Riga , and the extent to which Ukraine’s future security rests on getting its economy right, there was a consistent tension in all the capitals we visited, about whether reforms needed to be incentivized and concerns about moral hazard.

The sad reality is that for much of its post-Soviet history, successive Ukrainian governments postponed taking the hard and harsh steps needed to bring about real change, in part because of the short-term pain and dislocation, not only for the general masses but also in ways that would threaten the well-being of elites. Delaying these steps, however, does not make it easier. Instead of a gradual reform of the energy sector—a reform that would have, over time, eliminated some of the major sources of corruption in the economy—the current government is now forced to enact major, sharp increases in energy prices—fueling discontent and, for elected politicians, the worst nightmare of all—cratering poll ratings. Moreover, as part of the conditionality for receiving assistance, the Ukrainians must enact a whole host of structural reforms in a short time, rather than in a more staggered, sequenced manner—and to do so in conditions of internal disquiet and extensive external pressure from Russia.

The Ukrainian government has turned to its respective partners in the West, starting with the European Union and its member-states, for aid and assistance. Yet what is on offer is far less than what Ukraine needs. Moreover, these requests come at a time when there are more demands placed on donor countries both because of their own anemic economic performance and other, competing imperatives.

One view we encountered was that Ukraine’s past mistakes and corruption should not be held against the new government; that the clock ought to be reset and that the West should do more. In particular, the European Union ought to guarantee that, if Ukraine fulfilled all the relevant criteria, it would be eligible for full membership in the EU—and that such a perspective would give the new government the ability to rally the population for renewed sacrifice if there was the guaranteed light of EU membership at the end of the tunnel. In this view, Ukraine could not be expected to continue to take very harsh medicine without some promise of success—and without some amelioration of the short-term impacts.

Another view was that the West is now in its 24th year of aiding Ukraine in its transition—and that large sums had already been expended with very mixed results. The steps taken so far by the new government were indeed laudable—but much more needed to be done—and it should be accomplished not as the result of “bribery” but out of a commitment that these types of changes were in Ukraine’s own national interest. “Virtue should be its own reward” (particularly in terms of fighting corruption) was a sentiment repeated several times. A Ukraine that successfully completed reforms might very well be a candidate for EU membership—but that perspective should not be offered prematurely.

Policymakers in different EU countries are grappling with different ethical dilemmas. For some, the determination of Ukrainians to make “this time” different deserves full-throated support and a willingness to forgive the mistakes of past governments. For others, Ukraine had several chances and there are other, even more pressing issues at hand where resources need to be spent (say, in providing more aid to northern and sub-Saharan African countries). In a time of scarcer resources, others may have equal or even better claims that need to be satisfied over Ukraine’s requests.

This debate will intensify as Ukraine prepares to move to the second stage of key reforms—and with regional elections coming up, local politicians will be caught between ameliorating short-term discomfort and forfeiting long-term gain. In addition, the first tranches of aid and loans will be expended. Will more be forthcoming?

Ultimately, there is a chicken and egg dilemma at work here. In 1989, a country like Poland—which at the time had a GNP similar to Ukraine’s—underwent “shock therapy” with significant support from the West, which paved the way for the country’s economic transformation and its ability to become part of the Euro-Atlantic world. But did Poland’s willingness to undergo the shock make it easier to get outside support, or was the guarantee of outside support the basis for its willingness to plunge into reform? This is the question which today bedevils both the Ukrainian government and its Western partners–and who will undertake the next set of steps?

 

 

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  1. Nikolas Gvosdev says:

    Adding to the discussion on the ethics of what Ukraine is owed, this Josh Cohen op-ed, “Why investors who bet big on Ukraine should shoulder their own losses” (http://blogs.reuters.com/great-debate/2015/06/03/why-investors-who-bet-big-on-ukraine-should-shoulder-their-own-losses/)

    Some key points:

    “There may be only one way out of this mess for Ukraine: to default on its international debts and tell its foreign creditors to take a hike. While some argue that government debt restructurings are akin to theft from “powerless” creditors, Ukraine’s foreign bondholders are sophisticated investors — including one of America’s biggest investment firms — who knew the risks of investing there. No money from the International Monetary Fund (IMF), which is injecting cash into the Ukrainian economy, should go toward repaying Ukraine’s debts to foreign creditors.”

    And this conclusion:” The Ukrainian government’s first responsibility is to its people, and if Kiev implements the painful social spending cuts mandated by the IMF, then at a minimum Ukraine’s IMF money should not be used to protect sophisticated foreign bondholders from the consequences of their poor investment decisions at the expense of ordinary Ukrainians.”

  2. Mickey says:

    The ‘right thing’ is not about Ukraine, still when they pledged their allegiance to European values you can find things like this, http://i.imgur.com/LnBr2iH.png, and see that corruption and lies consumed Ukraine completely and it finally lost its way out.

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