Tag: ukraine

Not Just Another Friday in Brussels

While a typical summer Friday in the capital of the European Union might sound like a rather dull affair, today brought two significant events–one of them good, the other one less so.

First, the good news. Today, Ukraine, Moldova, and Georgia signed their association agreements with the European Union (EU). The treaties consist of, in part, free trade agreements between the EU and the three countries, and also a roadmap toward a prospective EU membership. Given the economic and political shape these countries find themselves in, the latter will likely take a long time and will not be without hurdles. After all, Turkey signed its association agreement back in 1963 and the country is still not a member.

There can be little doubt that free trade agreements with the EU will do good to these impoverished economies (GDP per capita in Moldova is just a little over $2,000) as well as to the EU. Furthermore, the prospect of a timely EU membership will hopefully serve as an impetus for economic and institutional reforms–just as was the case in the countries of Central and Eastern Europe that joined the EU in the past decade.

Of course, the EU is far from perfect and it is quite possible that these countries will soon grapple with the same problems as Slovakia, Czech Republic, or Bulgaria–namely how to manage the inflow of “structural funds” into their economies without encouraging corruption and entrenchment of venal elites. But arguably, that will not be the worst problem to have, considering that the alternative is the continuation of the status quo, muddling along from one crisis to another and being part of Russia’s zone of influence. Further enlargement, extending the common market and free movement of people further east, will likely prove to be beneficial to the EU as well.

Second, the bad news. The EU leaders have appointed Jean-Claude Juncker as the new head of the European Commission. Although initially the governments of Sweden and Netherlands had misgivings about his presidency, in the end it was only the UK’s prime minister, David Cameron, who decided to openly oppose the nomination.

The issue is not just with the personality of the candidate, but also with the process through which Juncker was selected. For the first time, the European Parliament took the lead in picking the head of the Commission, while no treaty empowers it to do so. While the appointment needs to rely on a parliamentary majority, the choice has always been made by the political leaders of EU member states, not by the Parliament. For those who do not wish to see the accountability of the Commission to national politicians wane completely, the Juncker appointment should be a cause for concern.

Let us hope that these two events are not completely unrelated. Hopefully, the prospect of another eastward enlargement will serve as an impetus for European policymakers to look for a model of European governance that provides the benefits of the common market and effective action on issues of mutual interest, without entrenching an obscure and unaccountable center of power in Brussels. 

NATO - What Is It Good For?

With continuing instability in Ukraine, and Poland’s foreign minister Radek Sikorski allegedly using vulgar and racist language to disparage the US-Poland alliance, now’s as good a time as any to evaluate what NATO does for Americans.

Not much, I argue in Foreign Policy (online). As I conclude:

NATO has produced some benefits, but the costs to the United States – tens of billions per year, validating Russian nationalist narratives about the West, and infantilizing its European partners – are often ignored. Washington should cut the Europeans loose, and encourage them to cooperate with each other on European security matters. With a combined GDP larger than the United States and a benign threat environment, Europeans are capable of defending themselves, but won’t until Washington makes them.

Please give it a read.

Balcerowicz’s Polish Big Bang versus Ukraine

On May 21, 2014, Leszek Balcerowicz will receive the 2014 Milton Friedman Prize for Advancing Liberty during a dinner at the Waldorf-Astoria Hotel in New York. The prestigious annual award by the Cato Institute carries with it a well-deserved check for $250,000.

For those who might have forgotten the accomplishments of my long-time friend, allow me to suggest that, in Balcerowicz’s case, a picture is literally worth a thousand words.

But, before the picture, a little background.

In 1989, Balcerowicz became Poland’s Deputy Prime Minister and Finance Minister in Eastern Europe’s first non-communist government since World War II. Balcerowicz held these positions from 1989 through 1991, and again from 1997 through 2000. Subsequently, in 2001, he became the Chairman of the National Bank of Poland, a post he held until January 2007.

A student of the “Five P’s”: prior preparation prevents poor performance; Balcerowicz was ready when he first took office in 1989. Indeed, he pulled his comprehensive economic game plan to liberalize and transform the Polish economy out of his desk drawer and proceeded to implement what became known as the “Big Bang”. As they say, the rest is history.

The results of the “Big Bang” speak for themselves in the accompanying chart. Poland’s economy has more than doubled since the fall of the Soviet Union in 1992, growing at an average annual rate of 4.42%.

What about neighboring Ukraine? The contrast with Balcerowicz’s Poland couldn’t be starker. As Oleh Havrylyshyn, the former deputy finance minister of Ukraine, spells out in his classic book – Divergent Paths in Post-Communist Transformation: Capitalism for All or Capitalism for the Few – Ukraine rejected the Big Bang, free-market approach to reform. In consequence, it has taken a road to nowhere, remaining in the shadow of a corrupt communist system.

Unlike Poland’s prosperity, Ukraine has witnessed a post-Soviet contraction in its economy. Yes, the Ukrainian economy has been contracting at a real annual rate of almost 1% since the fall of the Soviet Union. Accordingly, it is smaller today in real terms than it was in 1992.

Many think the International Monetary Fund, which just ponied up $17 billion for Ukraine, will turn things around. Don’t hold your breath. Over the years, the IMF has dispensed its medicine and money in Ukraine with negative results.

When it comes to much-needed liberal economic reforms, one has to do something big; something that captures the public’s imagination and garners wide support. Unfortunately, Ukraine lacks a clear economic game plan – one with wide popular support.

Beware of the Kremlin’s Propaganda

Since the beginning of the turmoil in Ukraine, some have attributed a large part of the blame for the crisis to the European Union and the United States, whose meddling allegedly brought down the President Viktor Yanukovych.

While, as a general rule, the foreign policy of the EU and the US deserve to be criticized on various grounds, it should not be forgotten that other actors are present on the world’s geopolitical scene as well – some of them quite malevolent. The idea that the eclectic, bottom-up movement that fueled the revolution in Kyiv was somehow orchestrated by the United States (and/or by the notoriously unimaginative bureaucrats in Brussels) is grotesque – as is the notion that Russia’s invasion of Crimea is a response to genuine secessionist desires of the citizens of South-Eastern Ukraine.

In short, one needs to be careful to avoid the trap of falling for the propaganda spread by Russia’s current regime, as Alexander McCobin and Eglė Markevičiūtė, both from Students for Liberty, argue here:

It’s much too simplistic to solely condemn the United States for any kind of geopolitical instability in the world. Non-interventionists who sympathize with Russia by condoning Crimea’s secession and blaming the West for the Ukrainian crisis fail to see the larger picture. Putin’s government is one of the least free in the world and is clearly the aggressor in Crimea, as it was even beforehand with its support of the Yanukovych regime that shot and tortured its own citizens on the streets of Kyiv.

[…]

Some libertarians’ Kremlin-style speculation about pro-western Maidan’s meddling in Crimea’s affairs is very similar to what Putin’s soft-power apparatus has been trying to sell in Eastern Europe and CIS countries for at least 15 years. Speaking of the Crimean secession being democratically legitimate is intellectually dishonest given that the referendum was essentially passed at gunpoint with no legitimate choice for the region to remain in Ukraine’s sovereign power.

A Bumpy — but Hopeful — Road Ahead for Ukraine

Even when one tries to ignore the current developments in the East of the country, Ukraine is in a pickle. With one of the lowest incomes per capita among the transitional economies of Eastern Europe, rampant corruption, and quickly depleting foreign reserves, the country is overdue for a reform package in many areas, including fiscal and monetary policy, the judiciary system, bankruptcy law, energy policy, state ownership, to name just a few.

While there is no shortage of foreign experts offering their views on what policies Ukraine needs or does not need, the future of Ukraine is for Ukrainians to decide. Still, the outside world can help. The Cato Institute, for example, is teaming up with the Atlas Network and the Kyiv-based European Business Association this week, hosting an emergency conference on Ukrainian economy.

Instead of policy wonks from Washington, the conference convenes a stellar group of policymakers from the region, who have direct experience with reforms enhancing economic freedom. The speakers include Einars Repse, the former Prime Minister of Latvia, Ivan Miklos, author of Slovakia’s flat tax revolution, Kakha Bendukidze, who as Minister of the Economy was the driving force behind economic reforms in Georgia, Sven Otto Littorin, the former Minister for Employment of Sweden, who assisted with the liberalization of the country’s labor markets, Jan Vincent-Rostowski, until recently the Minister of Finance of Poland, as well as Cato’s very own Andrei Illarionov.

The conference website is here, and you can follow my live twitter feed at this link. Notwithstanding the pessimism of the daily news coming from that part of the world, the recent events in Ukraine have given its people and its leaders a unique window of opportunity to make a departure from the country’s post-Soviet legacy and to put in place institutions that will lead to economic opportunity, freedom, and shared prosperity.

Bulgaria’s Currency Board versus Ukraine’s Chaos

When Communism inevitably and finally collapsed, Bulgaria’s economy was a basket case – behind almost all other communist basket cases, including Ukraine’s. Indeed, Bulgaria defaulted on its debt in 1990. By February 1991, Bulgaria had broken out in a bout of hyperinflation, with the inflation rate at 123% per month. And in February 1997, Bulgaria experienced the agonies of hyperinflation again, with the inflation rate reaching 242% per month. 

As he looked into the abyss, President Petar Stoyanov decided against taking the plunge and appointed me as his advisor in January 1997. I immediately prescribed a currency board system to put an end to Bulgaria’s malady, something I had laid out for Bulgaria back in 1991 (Steve H. Hanke and Kurt Schuler, Teeth for the Bulgarian Lev: A Currency Board Solution. Washington, D.C.: International Freedom Foundation, 1991.).

Bulgaria installed a currency board in July 1997. The lev was backed 100% by German marks and traded freely at a fixed rate of 1000 leva to 1 mark. Inflation and interest rates fell like stones. The economy stabilized, and the Bulgarians learned that, even though stability might not be everything, everything is nothing without stability. Discipline at last.

Yes, the main feature of a currency board is the fiscal and financial discipline that it provides. No more running to the central bank for a fiscal bailout. A currency board ties the hands of those meddlesome monetary authorities. And forget the silly theoretical and obscure arguments made by economists who don’t embrace fixed exchange rates. A currency board regime is all about discipline.

As we watch Ukraine melt down once again, we can see what could have been (and what could be) if Ukraine would have only embraced a system of discipline (read: currency board) – like Bulgaria did in 1997. The following table tells the tale:

Bulgaria versus Ukraine

Country

GDP per Capita (USD)

Fiscal Balances %GDP

Current Account Balances %GDP

General Govt. Gross Debt %GDP

Gross Borrowing Needs %GDP

Import Coverage Ratio (FX Reserves / Imports)

W.B. Ease of Doing Business 2014 Rank

Bulgaria

$7,623

-1.9%

1.5%

16.0%

2.6%

6.7

58

Ukraine

$4,011

-8.7%

-8.9%

42.8%

11.0%

1.9

112

Sources: Bulgarian National Bank, National Bank of Ukraine, J.P. Morgan (Emerging Markets Research), International Monetary Fund (IFS), World Bank (Doing Business). 

Prepared by Prof. Steve H. Hanke, The Johns Hopkins University.

Nightmare Scenario Underway in Ukraine

As the Ukrainian security forces are moving to clear Kiev’s ‘Maidan’ protest camp again, after an unsuccessful attempt last night, the events are unfolding quickly and with the characteristically scary dynamics of an autocratic regime acting under pressure:

Ukraine’s state security service said it was launching an “anti-terrorist operation” across the country after the seizure of administrative buildings and arms and ammunition depots by “extremist groups.”

Labeling the opposition as ‘terrorists’ is a common rhetorical device used by authoritarian governments under duress. But we should make no mistake – the current situation is not just an outcome of the divisions existing within Ukrainian society but also a result of Vladimir Putin’s long standing and sinister meddling in Ukraine.

For Mr. Putin, the current situation is both a source of fear and an opportunity. The fear stems from the possibility of Ukraine setting a precedent of a bottom-up, civil society-driven initiative displacing a Moscow-sponsored leadership in a country with strong cultural and historical ties to Russia. The opportunity lies in leveraging the current unrest and the ethnic divisions it has uncovered to strengthen Russia’s influence over the country’s politics. The Russian government already provided Mr. Yanukovych with cash in December 2013; this week, another bond purchase worth $2 billion was announced, conditional on the government successfully tackling the opposition.

The international response is too timid given the magnitude of the problem and its proximity to the European Union’s borders. Targeted EU sanctions, such as the asset freezes and travel bans directed at Ukrainian officials, which are likely to be adopted tomorrow, seem fully justified–although they come very late. Still, care needs to be exercised so that they hurt the regime and not ordinary citizens.

More importantly, European leaders need to clearly articulate the long-term alternative that they are offering to Ukraine lest it remain the Kremlin’s client state. The roadmap to full EU membership ought to have an accelerated timeline, incentivizing Ukrainian policymakers to adopt open political and economic institutions.

The EU’s engagement with the country needs to come with tangible benefits for Ukrainians. Those would include most fundamentally a removal of trade and regulatory barriers, as well as immigration restrictions, making Ukrainians a de facto part of the common European market now rather than at an uncertain point in the future.