Draft Law on the Budget Code is not about decentralization, although it has some positive developments.

By Ilona Sologub (Kyiv School of Economics, Ukraine)

On August 8^th, the government registered the Draft Law on changes to the Budget Code concerning decentralization. The draft law has already received some complimentary as well as some negative (here and here) feedback. Since the Draft Law was supposed to become an integral part of the decentralization reform package, this post analyzes it from this point of view. The main conclusions are:

1. The proposed amendments to the Budget Code do not correspond with the logic of the reform and with the Decentralization Concept adopted by the government.
2. It seems that the main motivation behind the proposed Budget Code amendments was “making the central government look good” by transferring all problematic issues, such as cultural and ecological projects, renovation of housing, etc. to the local level while keeping the most “electorally valuable” spheres, such as education, healthcare, and social protection under the central government hand.
3. The Draft Law contains some positive developments, such as the new system of calculating inter-budgetary subsidies and somewhat eased procedures for obtaining external loans by local governments.

The more detailed analysis is presented below.

Kyiv People’s Republic: A threat to Ukraine

By the Editorial Board of VoxUkraine

It has been six months since the Maidan movements toppled President Yanukovych. Yet, there has been little progress in reforming the country. In this post, we summarize our obsevartions and dicuss how Ukraine should move forward.

Observation 1. There is a lack of sense of urgency among players in Kyiv.

Ukraine is in danger. There have been no radical reforms since the departure of Yanukovich and after a brief pause the corrupt reactionaries are back and “business as usual” is at full swing. High expectations of local businesses for positive changes are waning quickly. The government, the president, and the new and old political forces are talking a lot about reforms, but instead are reading themselves for the new elections and have put serious reforms on hold until the new distribution of power becomes clear. There is a profound lack of sense of urgency among the players in Kyiv. This can prove to be a death sentence for the sovereignty of Ukraine. 

The situation is very dramatic. The economy has entered recession and the projected GDP growth is negative, systemic corruption has not been touched, the risk of gas shortage in the winter is growing, foreign exchange market remains turbulent endangering already heavily hit banking, and there is no feasible lasting solution in sight for the war in the East. The capacity of the executive power continues to be extremely limited, with incompetent bureaucrats populating most of the offices, and their incentives have not been aligned with that of the public. The public is increasingly disillusioned with the political will of new government and the president to reform the country, as well as with some of the new wave activists.

If Ukraine Needs Lustration in 2014

By Bohdan Vitvitsky (Former Federal Prosecutor and Assistant U.S. Attorney, U.S. Department of Justice; New Jersey, USA)

The two principal rationales for lustration in countries such as Czechoslovakia, Hungary and Poland that implemented lustration projects in the 1990s were a fear of penetration by communist or Russian secret services and a fear that former informers or collaborators of such secret services could be blackmailed into serving interests other than local national interests.

If Ukraine as represented by the Deputies in the Rada believes that either or both of such fears continue to be justified in Ukraine today, then a lustration project that addresses those fears might be implemented.  It should, however, be understood from the outset that lustration is not the tool for dealing with corruption or with the absence of integrity and professionalism among public servants.

Comments on the Ukrainian Draft Law on Lustration

Comments on the Ukrainian Draft Law on Lustration

By Bohdan Vitvitsky (Former Federal Prosecutor and Assistant U.S. Attorney, U.S. Department of Justice; New Jersey, USA)

A bad law on lustration is worse than no law on lustration.  There is a popular draft of a law proposed by Yegor Sobolev and others and supported by a number of NGOs.  In its present form, the Ukrainian draft law on lustration prompts many serious reservations.  These reservations arise mainly because the draft law violates key provisions contained in Council of Europe recommendations relating to laws on lustration; because the draft law is in important respects altogether impractical; and because perhaps what Ukraine needs now, as reflected by all surveys of public opinion, is a significant reduction in levels of corruption rather than a post-communist style lustration.  

How to restart lending in Ukraine despite unfavorable macroeconomic and legal conditions

By Yuriy Gorodnichenko (UC Berkeley) and Dmytro Sologub (Raiffeisen Bank Aval)

Bank lending dries up in recessions and Ukraine is no exception. In January-July 2014 total loan portfolio of the banking system shrank by 8% as both loan demand and supply nearly vanished in response to looming political and economic risks. Whether tight credit is a cause or an amplification mechanism in recessions is perhaps not so important from a practical standpoint because in either case the key issue is how to restart lending to minimize adverse effects of depressed economic activity. This is a challenge because default/counterparty risk in recessions is high and so banks are reluctant to issue new loans. In Ukraine, this risk is further magnified by imperfect legal environment (i.e.  pervasive loan fraud as well as weak and slow legal enforcement of loan agreements) and tight funding conditions (the access to global debt markets is shut down, while the banks faced strong deposit outflows in the first half of this year) .

Source: IIF

So, how can Ukraine’s government restart lending? In an ideal setting, the right answer is that the sustainable lending growth should be based on the stable macroeconomic conditions, adequate legal framework, and healthy and transparent banking system. Unfortunately, none of that is feasible in the short-run and even if comprehensive economic and structural reforms are started now, we will not see effects for some time. Therefore, the question is what should be done here and now to facilitate bank lending in Ukraine. This task could be understood as a constrained optimization problem: the objective is to restart lending subject to constraints, such as macroeconomic instability, imperfect legal environment and low confidence in the banking system.