On Sept. 21, the leading presidential candidate, ex-Prime Minister Yulia Tymoshenko, who leads the 20-member Batkivshchyna faction in parliament, presented her economic program.
The program is entitled “The New Economic Course: Strategy of Innovative Development.” It is a 401-page document.
In this piece, I describe the key ideas in the program.
In short, the course proposes to use fiscal stimulus (in this case, credit) to support development of high tech and high value-added industries (see e.g. pp. 31, 36, 107, 251). There are no specifics about how these industries and business will be selected and how this stimulus will be financed (except for the reference to the international financial institutions, p. 269, discussed below).
In addition, the program acknowledges the importance of macroeconomic stability (price/inflation stability, pp. 198 and Section 18) and the fact that Ukraine has large government debt (Section 9).
It states that it is important to continue collaborating with the International Monetary Fund (p. 115) and other international financial institutions (p. 268).
The program also proposes to gradually reduce the external debt by, partly, substituting it with domestic debt (p. 265). One specific proposal is to renegotiate in favor of Ukraine the conditions of the value investment ratios (p.268) that require Ukraine to pay potentially up to 40 percent of its GDP growth. In terms of monetary policy, there is a proposal to use a different set of instruments/mechanisms to target inflation (e.g., repo operations instead of deposit certificates) and to engage the central bank and the state banks in the stimulus of the economy (p. 286). Finally, there is also a proposal to reduce and restructure some taxes to improve business environment (Section 10, p. 143, Section 15, pp. 219, 226), but this is not given a prominent role in the program.
The goals of fiscal stimulus and macroeconomic stability are potentially incompatible.
Fiscal stimulus must be financed. It can be done either through emission, increasing government debt, or reducing budget expenditures in other areas. Emission will jeopardize macroeconomic stability. The program rules out increasing government debt (for example, Section 17, p. 263 postulates target for a budget deficit at 1.5 percent and a decrease in the total debt as a share of GDP) and is silent about what other expenditures will be reduced. The financing of fiscal stimulus might also be in tension with a reduction in taxes.
Thus, the program document gives no clear answer how to reconcile competing objectives – stimulus and macroeconomic stability. Section 17, p. 269 suggests that stimulus can come from the International Financial Institutions. However, there are no specifics and it is unclear why these institutions would agree to do so. In my view, the economic program “The New Economic Course” should do a much better job explaining the source of funding for the stimulus and how the government will meet its other objectives (pensions and other social payments, price and exchange rate stability, budget discipline, etc.).
The document correctly identifies a number of other critical issues for the economy. For example, it discusses the significance of energy efficiency and energy independence (Section 21). There are specific policy proposals. Nevertheless, the program stays silent about the contentious issue of increasing the price for the population. Yet, the price that is equivalent to the import price will provide proper incentives for the economy to decrease consumption of energy, invest in energy efficient technologies, and reduce opportunities for corruption and pseudo-budget deficit (the losses of companies supplying gas to the public at the prices below the market). (For an intro discussion of these issues, please see here).
There is a discussion of the agricultural industry (Section 23). It touches on the issue of the market for land, but does not provide a clear answer about whether the program supports introduction of the market. There are references to the importance of securing property rights first, protection of small and medium farmers, and description of the land market restrictions in other countries.
The fiscal discipline, the gas pricing, and the market for land are all crucial conditions for the renewal of financing from the IMF (there is willingness to accept a delay on the market of land). If the cooperation with the IMF and other IFIs is to be continued, these issues have to be resolved. Otherwise, it is important to explain the alternative sources of financing for the government of Ukraine, even without fiscal stimulus.
The program correctly describes one of the most important economic problems: lack of proper capital markets (Sections 8 and 19). The document suggests that the reason for low credit is the inadequate monetary policy of the central bank (see e.g., pp. 290-291 and throughout the text). One alternative view is that there is lack of credit and investment because of insecurity of the property rights and corruption. The idea of the effectiveness of fiscal stimulus is in direct conflict with this view. If property rights are insecure and the investors, including the state, cannot guarantee the funds get into the correct hands and the conditions of funding are fulfilled, the stimulus might simply become redistribution from taxpayers to specific (connected?) industries and businesses. Therefore, the program should be much clearer about how it proposes to ensure the security of property rights and the development of proper capital markets.
Yes, there is a discussion of the importance of secure property rights (pp. 203-204). At the same time, the program criticizes the current oligarchic structure of the economy (see e.g. pp. 148-149, 155) where a small number of individuals and groups own a substantive share of the economy.
So, what will happen to the property of these groups?
Will there be amnesty and they will be allowed to keep their property?
Or will there be a redistribution of property from oligarchs to the state or the public?
If so, how would it be possible to simultaneously guarantee secure property rights.
Or will there be no redistribution, but the antitrust authorities will regulate and split up monopoly businesses if justified? The document should provide more credible detail.
Fiscal stimulus financed by emission or government debt has been tried in Ukraine before. So far, it has not worked. The feasibility of fiscal stimulus financed by international financial institutions is questionable.
In any case, even if financed, fiscal stimulus in Ukraine tends to fail partly because of corruption and partly because of the weak ability of the state to identify promising projects and to ensure that the stimulus funds are not a waste.
How is this time going to be different?
The program of Yulia Tymoshenko should provide a convincing answer.
Tymofiy Mylovanov is a professor at the University of Pittsburgh, deputy chairman of the National Bank of Ukraine Council and honorary president at the Kyiv School of Economics.
