It
is a pleasure to be here and I want to thank the Rector, the Faculty and the
students for your hospitality in welcoming me today.
I
think most of you know that yesterday was Lenin’s birthday. The timing is a bit
ironic because I have come here to share with you today my thoughts on the need
for economic and business reform. For 20 years the U.S. Government has shared
its ideas and provided assistance to help Ukraine become the democracy and
market economy ruled by law that I know you all want. I have come to update you
today on what the U.S. thinks should be done. Shto delat!
I
could not think of a better place to come and address this issue than the new
Economic University. This fine institution is preparing young Ukrainians to
become members of the economic and business vanguard of the
country.
Sixty
years ago, the famous American general Dwight Eisenhower was elected President
of the United States. Just before the election, Eisenhower made a
statement that is still quoted today: “Neither a wise nor a brave man lies down
on the tracks of history to wait for the train of the future to run over
him.” He went on to serve two terms as President and led my country to
make investments in its future that are still paying off today. This
included building our interstate highway system and launching our space
program.
Eisenhower’s
words directly apply to what I want to discuss with you today: that is,
investing in your country’s future by strengthening institutions and pursuing
economic reform. This is a recipe for increasing stability and creating
opportunity for all – including graduates of academic institutions like this
one.
Change
effected through government action never comes easily because there are always
people who have a stake in the status quo. Reform, by definition, involves
correcting a situation to make things work more effectively — and getting
political consensus to travel down that road is particularly
arduous.
Just
look at my own country! We face particularly strong challenges to
reforming our social safety net so that it can meet people’s needs andbe
soundly financed for the next generation, and our struggle to get there has
caused immense political discord. It has even at times disrupted
government operations. However, there is agreement across the political
spectrum in America that if we face these challenges successfully, we will
experience significantly higher growth.
We
don’t have it all figured out, but we have been working at shaping our economic
system by using the tools of democracy for nearly 250 years. Our history
shows how smart reform has been essential to economic success. I believe
the same can hold true for the challenges faced by Ukraine.
So
let me use some time today to share my thoughts about Ukraine’s economic future,
drawing from the experience of the United States. And let me take a cue
from Former President Clinton who spoke in St. Michael’s Square in June
2000. He so nicely articulated our enduring posture of partnership towards
Ukraine as it transitions to a prosperous market-based democracy.
President
Clinton said, “America will stand by you as you fight for a free and prosperous
future…I cannot tell you how to build your future, but I do believe
this: I believe Ukraine has the best opportunity in a thousand years to
achieve both freedom and prosperity. You are on your way… All you need
now is to stay on course and pick up speed.
Open
the economy; strengthen the rule of law; promote civil society; protect the free
press; break the grip of corruption…You must use your freedom to make sure you
and your children prosper in peace. America is your friend and your
partner.”
Again,
as President Clinton said, “You are on your way.” But we must recall that
at independence, Ukraine inherited an economic system that used cheap energy to
create commodity products, like metals and chemicals. This country has
come a long way since that time, but the legacy of its past economic structure
remains a challenge in an era of increasingly expensive natural gas and
oil. There is clear value to be had in economic diversification. But
to get there will take reform and institution building.
Many
experts believe that one way Ukraine can help itself is by attracting foreign
investment into underdeveloped economic sectors. For example: agriculture,
domestic energy production, and manufacturing as well as high-value-added
services like software development. To move in this direction, it will be
important for the Rada to work with President Yanukovych to continue the process
of economic reform.
Fortunately
for Ukraine, it is not necessary to reinvent the wheel. There has over the
years been an extraordinary amount of good advice prepared for this
country. For example, the International Commission of Independent Experts,
chaired by Anders Aslund and Oleksandr Paskhaver, provided a comprehensive
assessment in 2010 of what needs to happen going forward. You may recall
that their first recommendation was, “Carry out gas reform!” and they went on to
address issues such as the budget, land sales, and commercial legislation.
Numerous
NGOs and institutions have offered their own well-crafted recipes for advancing
the reform process here. These include the American Chamber of Commerce
and the European Business Association. And let us not forget that McKinsey
produced a very helpful report in 2009 titled “Reviving Ukraine’s Economic
Growth,” that contains insights into structural challenges that are still
relevant today.
I
merely wish today to emphasize the importance of following through and to note a
few areas that resonate in my own mind based on the experience of my own country
and the comments of American business people.
It
boils down to this: U.S. corporations tell me that to help Ukraine unlock
its economic potential, there first must be improvements in the commercial
environment. They want to spend less time on tax inspections and more time
looking for ways to grow. Business needs to know that contracts and deals
will be honored, and that intellectual property rights will be protected.
Corporations
are looking for an economy and consumer market that can expand robustly as a
result of sound macroeconomic management in an environment where rule of law is
firmly established. Such an environment can only come about amidst a commitment
to executing reform and building inclusive, strong
institutions.
Why
institutions and reform matter
Let
me act like a political science professor for a few minutes and describe to you
why well-crafted reforms and strong institutions matter.
This
was brilliantly analyzed last year in the book, Why
Nations Fail, by Daron Acemoglu of the Massachusetts
Institute of Technology and James A. Robinson of Harvard University. The book
contains a broad survey of world history and insightful analyses of numerous
individual countries, although it does not address Ukraine directly. Nevertheless, the book has much to say, I believe, to a student of the Ukrainian
economic and political system.
The
fundamental thesis of the book is that institutions matter political and
economic institutions are critical to a nation’s development. History,
culture, and geography count, but whether a nation puts into place sound
political and economic institutions can dictate whether it
succeeds.
In
one section, the authors compare North and South Korea – a case of a people
that shared the same history but were divided into two countries. The
economic development of these states could not be more starkly different.
The authors believe the difference lies in the South Koreans’ development of
effective institutions.
They
write: Inclusive economic institutions, such as those in South Korea or in the
United States, are those that allow and encourage participation by the great
mass of people in economic activities that make best use of their talents and
skills and that enable individuals to make the choices they wish.
To
be inclusive, economic institutions must feature secure private property, an
unbiased system of law, and a provision of public service that provides a level
playing field in which people can exchange and contract; it also must permit the
entry of new business and allow people to choose their
careers.
The
authors go further and argue, businessman who expects his output to be
stolen, expropriated or entirely taxed away will have little incentive to work,
let alone any incentive to undertake investments and
innovations.
Acemoglu
and Robinson argue that there is a synergy between political and economic
institutions. They write that: Extractive political institutions
concentrate power in the hands of a narrow elite and place few constraints on
the exercise of this power. Economic institutions are then often
structured by this elite to extract resources from the rest of society.
Extractive
economic institutions thus naturally accompany extractive political
institutions. In fact, they often form a vicious circle, mutually
reinforcing each other. Extractive institutions, by creating unconstrained
power and great income inequalities, increase the potential stakes of the
political game. Because whoever controls the state becomes the beneficiary
of this excessive power and the wealth that it generates.
The
authors conclude: Nations fail today because their extractive economic
institutions do not create the incentives needed for people to save, invest, and
innovate. Extractive political institutions support these economic
institutions by cementing the power of those who benefit from the
extraction.
To
my way of thinking, Acemoglu and Robinson have conceptualized the problem of
economic development for all nations quite simply but quite profoundly. A
society where power is not shared, where economic decisions favor the few rather
than the large majority of a country, where property is controlled by a small
group, and where the rule of law is undercut by a corrupt law enforcement and
judicial system, is simply not going to do as well as a country which promotes
openness, fairness, the rule of law, a dynamic media and overall a level playing
field.
The
Ukrainian context
Let
me be clear: I am not saying Ukraine is a failed or failing State. To the
contrary, it is a country of vast potential, natural and human. But to realize
that potential Ukraine must put aside the aspects of an extractive economy and
political system and fully embrace reforms.
Ukraine
must act against raider attacks, gross corruption, the lack of protection
of physical property and particularly intellectual property, the unjust
adjudication of issues by courts, and a huge and still widening gap in the
distribution of income between rich and poor. I could go on. Simply
put, reform must change the rules of the game in Ukraine if it is going to
compete effectively in the international global
marketplace.
By
making difficult decisions today, the Government of Ukraine can bring its people
huge positive payoffs in the future. History reveals that countries that
implement comprehensive economic reforms have higher growth rates.
Economic reforms improve adaptability, particularly when changes from abroad
affect an economy. Reforms remove distortions and reduce the risk of
economic crises.
Examples
of outcomes from smart reforms include: increased trade, a
better-functioning labor market, greater budget transparency, a healthier
financial sector, and new investment by foreign and domestic corporations…
and, of course, higher growth — perhaps at an average rate of 4% or more
annually in Ukraine, according to numerous economists.
Areas
of focus
I
would like to highlight four areas where I believe Ukraine needs to focus its
action. First, pursue policies and reforms that build strong relationships
with foreign partners. Second, enhance the rule of law, which bolsters the
business climate. Third, signal that the door is open to businesses in
those sectors where Ukraine wants to diversify its economy. And fourth,
ensure that higher education is shaped by the future economic needs of the
country.
Reforms
to build relationships with foreign partners
First,
let me talk about relationships with foreign partners, especially with the
European Union and the International Monetary Fund. We believe that
enhanced engagement with the European Union will offer Ukraine the best
guarantee of prosperity and stability for current and future generations, as it
has for so many of your neighbors. For example, since joining the European
Union over eight years ago, the economy of your neighbor Poland has expanded
approximately 43%, or 5% per year, and continues to grow this year.
Indeed,
during the recent global financial crisis, it was the only EU country not to
have a recession. Twenty years ago Poland and Ukraine had roughly equal
per capita income; today Poland’s is three times
larger.
We
welcomed the initialing of the text of the Association Agreement between the EU
and Ukraine and hope the agreement can be signed later this year as envisioned
at the recent EU-Ukraine Summit in Brussels. The Association Agreement
offers Ukraine a path to economic reform and prosperity in line with that found
in the EU. This would send a powerful signal to foreign businesses looking
to expand their commercial activities here.
I
agree with Ukraine’s Ambassador to the EU, Konstantin Yelisieiev, about the
merits of the Association Agreement. Yelisieiev noted in an article that
the terms of the Deep and Comprehensive Free Trade Agreement (DCFTA) embedded in
the Association Agreement include liberalization of trade not only in goods but
also services, liberalization of capital movement, and to a certain extent,
movement of labor.
Unlike
a conventional free trade agreement, the DCFTA will also require a comprehensive
adaptation of European regulatory legislation in the areas of transport, energy,
services, agriculture, and other key areas. Yelisieiev pointed out a study
that found the DCFTA with the EU would boost growth approximately three times as
much for Ukraine over the long term as the Customs Union.
And
let me note that the U.S. recently announced that it would pursue a free trade
agreement with the E.U. — a very significant development, given that our two
economies account for roughly half the world’s economic
output.
I
also hope to see Ukraine succeed in its efforts to re-engage with the IMF.
The IMF’s approach is based on experience stabilizing and reforming the
economies of many countries. Successful engagement would reinforce
confidence among international lenders, potential donors, and private
investors. Over the years, Ukraine moved forward in areas where it
committed with the IMF to reforms, such as with regard to pensions and to
strengthening the banking sector.
However,
other commitments went unfulfilled, like rationalizing gas and heating tariffs
and reforming the VAT refund system. The reforms the IMF advocates are for
Ukraine’s good not that of the IMF; they will lead to a more prosperous
country.
Rule
of Law and the Business Climate
The
importance of rule of law to improving the business climate and bolstering
economic development simply cannot be overstated. Courts must reliably
settle disputes and uphold contract obligations fairly and consistently;
otherwise, entrepreneurs and foreign investors will look to other markets, not
wanting the profits from their hard work to be stolen by rivals or corrupt
officials.
Here
in Ukraine, in the absence of reliable protection of physical property rights
and intellectual property rights, the business climate will remain weaker than
its potential, and many of the best-educated will seek to leave the country for
greener pastures.
Foreign
businesses will think twice before investing when they have alternatives in more
predictable and more welcoming markets. In my time here, I have heard about many
potential investors who decline to come to Ukraine because they have heard
stories and read reports of foreign businesses already here that have
encountered severe problems. Problems like the inconsistent application of
the law, whether with regard to corporate raids or ensuring the timely
reimbursement of VAT payments.
Let
me say this as plainly as possible. Strengthening the rule of law is
integral to effective functioning of all the institutions and processes that are
essential to business activity. Examples include: entities involved
in tax collection and facilitating the flow of imports and exports; agencies
involved in permits and licenses that set minimum standards for professional
services; government offices involved in construction or modification of
buildings; and regulators like antitrust agencies that are essential for a
strong business climate.
Judges need to be professional, fair, accountable and independent from influence
or intimidation from prosecutors or other governmental bodies and private
interests.
They
simply cannot be used to further illegal activity. Nor can there be a perception
that courts can be used illegally. And the prosecutors’ nearly unchecked power
to intervene in every aspect of private life or business activities must be cut
back to meet international standards.
That
power must be limited by law to serving public and not private or self-
interests. It is so obvious that faith in the rule of law is essential for
business confidence. Make no mistake: In the absence of the rule of
law, corruption strangles the existing economy and the perception of
systemic corruption prevents new economic growth.
Let
me make a special note here about small- and medium-sized enterprises, the
backbone of successful economies. SMEs account for the vast majority of
firms in the U.S. and make up approximately half our gross domestic
product. They are major drivers of U.S. employment.
Rule
of law addresses obstacles to small business development, such as fear of
arbitrary or lengthy settlement of disputes with authorities. It draws
such enterprises out of the shadows, and it encourages financial institutions to
back them. The U.S. experience with SMEs is that such entities lead the
way towards higher-value-added economic activity.
Encouraging
small business growth would also likely help Ukraine diversify its economy
towards innovative and value-added sectors. In order to do that, however,
there must be confidence that officials will not be corrupt, institutions will
not be predatory, and raiders will not be successful.
More
broadly with regard to the business climate, I was pleased to see that Ukraine
recently moved from number 152 to 137 in the World Bank’s Doing Business
rankings. It is particularly impressive that Ukraine jumped 66 places to
number 50 for the category of “starting a business.” We hope to see more
start-up businesses in the country as a result. But Ukraine must still
wrestle with the fact that in other rankings, it falls below almost every
European country.
In
Transparency International’s corruption perceptions index, Ukraine is number 152
out of 182; in the Index of Economic Freedom of the Heritage Foundation, Ukraine
is 163 out of 183 several spots below Belarus; in the World Economic Forum
Global Competitiveness ranking, Ukraine is 83 out of 142. Clearly, more
needs to be done.
Let
me note the importance in particular of intellectual property rights to
Ukraine’s reputation as a location for commercial activity. People who use
their intelligence to create products like music, software, movies or even
formulas for new drugs, are sources of innovation for an economy. Their
assets need to be protected if they are to continue making new
innovations. Unfortunately, Ukraine is on our “Priority Watch List” with
regard to the state of intellectual property rights protection, meaning that we
have very serious concerns.
A
major group of rights-holders in the U.S. recently asked my government to single
Ukraine out as the sole Priority Foreign Country in the world, a designation
that would express our highest level of concern about the state of IPR
protection here. We have not yet made a decision and are analyzing the
situation carefully, but the fact that this issue is even on the table
demonstrates how seriously we view the situation. The EU shares these
concerns.
Without
adequate intellectual property rights protection, new businesses starting up in
software, music, and other areas are vulnerable to having their most important
assets stolen. This means the impressive improvement in “starting a
business” in Ukraine will have much lower actual benefit than expected.
Your institutions of higher learning produce brilliant, skilled engineers and
programmers, but their ability to capitalize on their education and talent is
hampered by IPR issues. The same holds true for your artists, writers,
musicians, and other creative citizens.
Reform
to open new sectors
Finally,
I would like to focus on two other critical areas for Ukraine’s
future.
First,
there is a need for a clear path forward for investors in areas likely to grow
in economic importance here.
I
am pleased that the Ukrainian government has signed a production sharing
agreement with Shell, and that it is now striving to complete agreements with
ExxonMobil and Chevron. The Ukrainian government has worked hard with
these companies to develop procedures and laws that will facilitate the
long-term investments of billions of dollars that will be needed to boost the
energy sector and promote energy independence.
In
5-7 years, Ukraine could be producing significantly more of its own gas and if
it uses energy more efficiently, might even be a net exporter in time.
Further, changes in global gas supplies and reforms in the EU gas market are
giving Ukraine new options when it comes to selecting how and from whom to
import the energy it needs.
Ukraine
also recently took steps forward on the path to adopt the standards of the
Extractive Industries Transparency Initiative. This is an important
statement to all stakeholders in energy projects. It shows that revenue
from resources passed to the government will be visible to the general
population.
I
hope that Ukraine will be able to extend its efforts in the energy arena to
other areas. It is up to Ukrainians, for example, to determine how to go
forward on land reform. But it is clear that if the terms of land usage
and leasing are modified, there is much room for foreign investment and enormous
productivity gains that would help revive rural economies and the lives of rural
people.
Education
Second,
is the absolutely critical importance of education.
In
my country, 2012 marked the 150th anniversary of the Morrill Act, legislation
signed into law by President Abraham Lincoln. It led to the establishment
of public agricultural, land-grant universities in the United
States.
The
economic benefits of public universities in the United States have been
enormous. Agricultural universities enabled small farmers to improve both grain
yields and household incomes dramatically. Per hectare wheat production
quadrupled from 1866 to 2000 and corn production sextupled over the same period,
increasing rural incomes and reducing prices of food on store shelves.
U.S. farms and firms further advanced to produce high value products.
For
example, the world-famous California wine industry owes much, both in terms of
achieving consistently high quality and in expanding to new areas of production
in the 1970s and 1980s, to the research and guidance offered by the University
of California at Davis. Public universities in the United States carry on
the land grant tradition by making higher education available for the majority
of Americans and by providing research useful for
businesses.
Unfortunately,
Ukrainian universities are too often separated from the practical concerns of
domestic private enterprises. Both higher education and private business
would improve performance if they were to bridge that gap. I realize there
are vigorous debates underway in Ukraine about how to take higher education
forward.
I
believe consideration of skills the economy needs coupled with the principles of
openness, transparency, and autonomy of educational institutions are powerful
beacons in this regard. These are the hallmarks of educational systems of
countries that are competing successfully in the global
economy.
Entrepreneurs
and company leaders can provide financial support, when merited. They can
also provide oversight to ensure that degrees conferred represent true mastery
of the disciplines important to a competitive economy. Progress toward
Ukraine’s universities having greater commercial relevance could be greatly
aided by setting them free to innovate and reducing outmoded models of
centralized state control that are a left-over burden from Soviet
times.
U.S.
Partnership
The
United States has been and will continue to be a partner of Ukraine as it
pursues its reform agenda. Over the past 20 years, USAID has provided
policy and technical assistance across all economic sectors to Ukraine, its
government bodies, industries, associations, and others.
For
example, USAID developed programs to mass-privatize nearly 10,000 industrial
enterprises and 50,000 small and medium enterprises; put 1.8 million land titles
into the hands of private farmers and created a legal aid network for
landowners; assisted Ukraine in achieving World Trade Organization membership on
February 5, 2008; and established Performance-based Program Budgeting within
Ukrainian municipalities.
Further,
my government has deep linkages with U.S. corporations and business
organizations, and we stand ready to join forces with them in engaging Ukraine’s
private and public sectors to create optimal conditions for commercial
interaction that will benefit both of our countries.
Conclusion
In
the end, it boils down to this: strong institutions coupled with clear and
transparent rules and processes harmonized with international best practices can
boost long-run economic growth and resilience.
I
wish you all the very best in your studies at this great institution. And when
you graduate, I hope you will become part of that vanguard of business and
economic reformers which this wonderful country needs, and which will lead it to
a proud place among the most globally competitive nations in the
world.
Thank
you.
