I first came to Ukraine in 1985, when I attended an economic forum where speakers preached conservative Marxism-Lenin. Still, I liked Ukraine and continued to come.
I served as an economic adviser to ex-President Leonid Kuchma in the 1990s and wrote a couple of books about the Ukrainian economy, the most recent of which is “Ukraine: What Went Wrong And How To Fix It?”
We have seen three big waves of reform in the last 26 years for Ukraine.
In 1994–1996, Ukraine achieved macroeconomic stabilization.
In 2000, Ukraine achieved such deregulation that it had sufficient freedom for high economic growth of an average of 7.5 percent a year for eight years.
But from 2014–2017, the last three years, we really have had a reform wave that brought about far greater changes than we’ve ever seen before.
Is it sustainable?
Is it the real breakthrough?
I don’t think we can answer these questions yet.
Still on agenda
Let me run down some big achievements and the four big issues on the reform agenda — pension, land, privatization and judicial reform. And I’ll add some possible kickers.
Ukraine has not only seen massive financial adjustment. It has seen big structural reforms that cut down on corruption but have not been fully appreciated.
Public expenditures in Ukraine were far too high. But they’ve been cut from 53 percent of gross domestic product in 2014 to 40 percent of GDP today. This is a massive cut. What has been cut? The big cut is energy price subsidies that used to be 8 percent of GDP — three-fourths of this went to a few gas trading oligarchs.
The state budget deficit has been cut from from 10 percent of GDP in 2014 to 2 percent in GDP in 2015. This is the great achievement of ex-Finance Minister Natalie Jaresko, who left office on April 14, 2016.
We have seen a lot of harmful subsidies, subsidies that went straight to corruption and amounted to theft from the state budget, closed down.
The payroll tax has been cut from 45 percent to 22 percent, which was absolutely necessary to legalize the payment of salaries, half of which were paid in envelopes.
The central bank has seen great achievements. Half the banks have been closed. The best way to rob a bank in Ukraine used to be to own a bank. But depositors and the central bank — essentially the same in one way or another — paid a high price for this robbery of $20 billion, an astounding figure that amounts to 20 percent of GDP.
Also, Ukraine instituted a floating exchange rate. It makes people poorer during devaluation but it was unfortunately necessary to balance the current account.
International reserves went from $5 billion in February 2015 to the current $17.6 billion. It’s the difference between panic and a reasonably stable exchange rate. ProZorro, the online transparent public procurement system, should save 2 percent of GDP by ending inefficient or corrupt public purchases.
But perhaps the greatest of all changes is the electronic declaration of assets, which showed that the average holding of a member of parliament is $700,000 in foreign cash at home, which is quite an achievement!
And thanks to a free trade agreement and visa-free travel, Ukraine can fully join the European supply chain.
Courts, rule of law
These are many and great achievements. What does Ukraine still need? It must have courts that function. Absolutely that has to be at the top of the agenda. As a consequence, Ukraine does not have property rights. This is awful — yes. It is also awful in all other post-Soviet countries with the possible exception of Georgia. This has to be fixed.
Ukraine needs a land market reform that can unlock its agricultural potential. If land market reform happens, a lot of money will flow into agriculture. It will lead to foreign investment coming in in all kinds of ways — probably in food processing rather than direct agricultural development.
Ukraine needs to continue decentralization and creating a functional state administration.
Needing 7% growth
Ukraine needs privatization. The state still owns 3,500 state enterprises. Most of them should be sold off and liquidated. The government should start with the small and worthless ones to get the privatization process going.
Currently, economic growth is 2.4 percent — I think it would be 2 percentage points higher without this silly blockade of trade between Ukraine-controlled and Russia-controlled areas of the Donbas, but it could easily rise substantially. Ukraine should aim for an economic growth of about 7 percent a year.
Investment is growing by 20 percent this year.
Exports are growing by 20 percent this year.
Finally if we get judicial reform, then we will really see growth, because then both foreigners and Ukrainians will dare to invest in quite another way.
We have many reasons to be optimistic about the Ukrainian economy, even if Ukrainians, for good reasons, have developed a strong habit of being very pessimistic. I think we are likely to break that habit.
Anders Aslund is a senior fellow at the Atlantic Council in Washington, D.C.
