Those choices were driven by a hatred of entrepreneurs, fetishism towards large industries and tolerance toward monopolies, and spiced with a deep-rooted belief in the government’s omnipotence.
Many also chose to support gangsters guided by the logic of “well, he is a thief, but it’s ok, provided that he shares with us.”
So, what do we have as a result?
The economy is in decline, the treasury is empty, and hard currency reserves are fast depleting. Meanwhile the country is being offered for sale to the highest bidder as Donald Tusk, the Polish president, has put it.
And this is not just due to the aftermath of the global financial crisis, or due to the evil deeds of Prime Minister Mykola Azarov’s predecessors, whom he loves to blame so much. Where we are is predominantly a result of bad policies, which are tolerated (or even mandated) by a large part of Ukrainian voters.
Sociologists say that whoever was set to win the presidential election in 2010, was expected to have a “strong hand” after years of non-existent management by the previous president. But in Ukrainian realities, with a mindset inherited from the Russian Empire and then the USSR, this unfortunately means Byzantine or Genghis Khan-style rule.
This means that personal loyalty, lack of transparency and the notorious vertical of power prevail over the rule of law, checks and balances and human rights. This could have worked in a medieval agrarian empire or even a contemporary resource-based economy, but it is subversive for a market economy.
We started off with a weak judicial system, and it’s now completely ruined. The courts are cancerously corrupt and not independent.
When someone complains about poor protection of intellectual property rights, they should take a look at the International Property Rights Index for 2013 to realize that it’s the country’s best performing position. Its ranked 92th out of 130, compared to 105th in legal property rights, and 122th in physical property rights!
The picture painted by the World Economic Forum’s Global Competitiveness Index is even gloomier: Ukraine appears in the lower third based on all indicators related to “institutions” (with the exception of violence and terrorism), notably ranking 143 (out of 148) in property rights, and even lower in the judicial system and in protecting minority shareholders.
But while institutions are failing us, the amount of taxes collected, allegedly for the public good, have dramatically increased. Official corporate tax rates decreases don’t matter since taxes are negotiated, often through the use of blackmail, both of which are pinned on revenue targets imposed by tax authorities – just like in England before the Glorious Revolution of 1688.
Thus, the overall tax burden is the only genuine indicator. It used to be around 18-20 percent of gross domestic product (payroll tax not included) before 2005. Then, to the chagrin of business, it went up to 22-23 percent due to the notorious populism of the Orange team. But then it leaped even higher to 25-26 percent under President Viktor Yanukovych, who had promised to reduce taxes.
Actually, in 2013 this number will have probably surpassed 30 percent. But even this will not be enough to satisfy the appetites of those in power who are benefiting from corrupt public (and state-owned enterprises’) procurement tenders, kickbacks have allegedly hit an incredible 50 percent – and preserve the populist policies in order to secure the support at least of those who are satisfied with “sharing” the loot.
Moreover, the government presents a stable exchange rate as its main achievement, a symbol of “stability”. But even a student can tell you that flexibility is key for the economy to be able to react healthily to shocks that make Ukrainian goods less competitive.
But since 2010, the government has basically done the opposite. It suppressed domestic producers by burning through the central bank’s reserves and tightening monetary police – both for the sake of “stability”. At the same time, the government has been crowding out private creditors, and on top of this banks became reluctant to issue loans to business due to the extreme risk of raiding. The result is that businesses cannot expand.
Perhaps the government hoped for a quick revival of the world economy that would invigorate bulk commodity production. But it did not happen. Meanwhile, due to government policies, small business contracted by roughly a third, with 2 million workplaces lost. By comparison, the whole industrial sector employs about 3 million. Agriculture and retail remained the only growing large sectors, but they could not outweigh the rest.
All these policies are likely to stay in place, as indicated by the fact that Yanukovych struck a more expensive deal with Russia, instead of cooperating with the International Monetary Fund, which has policy-related conditions and requirements.
So what does that mean for 2014? Despite the government’s optimistic forecast of 3 percent GDP growth, any sort of growth is extremely contingent on politics. At best, if the world economy indeed revives and no further politician turmoil takes place, it can reach 2 percent.
But by far the most probable prediction would be that Yanukovych will lose ground under his feet. Instead of taking the fishing rod offered by the trade pact with the European Union, he has swallowed a fish that happens to be bait – and got hooked.
By getting a handful of billions of dollars from Russia, he took one-half step away from the abyss. But Putin’s interest is to keep Ukraine as close to it as possible. Next year we will see all those tricks of balancing on the edge of the abyss.
Vladimir Dubrovskiy is senior economist at CASE, a private research foundation
