Friday, October 10, 2014

Does Ukraine have a plan? Some suggestions for the Strategy for Ukraine

By Ilona Sologub, KSE

It is always good to have a plan before approaching a problem. Ukraine today has a lot of problems, so it needs a very good plan to cope with all of them. Recently, the government and the President presented several plans of economic reforms. This article is an attempt to discuss these plans and to make some policy suggestions. In this post, I tried to set a framework such a discussion. However, the main message of this post is that absence of a completed and signed strategic plan should not be an obstacle for and immediate implementation of some obvious steps.

A strategy definition

A strategy is a multiple-steps action plan to achieve a certain goal. There are four necessary components of a strategy:

  1. The goal (a vision for the future). This goal should be feasible and achievable within the strategy time horizon. For example, I may have a goal to fly like a butterfly. This goal is infeasible, so I will never achieve it. I may also have a goal to lose ten kilos by tomorrow. This goal is feasible but not achievable within the given time horizon.
  2. A sequence of steps that would lead to the goal (i.e. an algorithm), with timing and a defined intermediary result for each step. For example, if I’m climbing a mounting, I should ascend for a certain number of meters every day.  There can be several possible paths to the top, and several algorithms to achieve the goal.
  3. Estimate of resources needed to achieve the goal and availability of these resources (this estimate will influence the choice of the exact path in the p.2 above).
  4. Person(s) responsible for implementation of the plan.

So which plans does Ukraine have?

 I found three documents that have some vision of the future:

  1. Strategy of regional development until 2020 adopted on August 6th, 2014.
  2. A plan for renovation of Ukraine presented on September 3rd, 2014. During its presentation, the Prime minister said that “the reform plan for the country is the Association Agreement between Ukraine and the EU”, so there is no need “to invent a bike”.
  3. Ukraine 2020 Strategy presented on September 29th, 2014.

Of the listed three documents, only the first one in some way includes all the four components listed above. It contains the list of measures to be implemented, the list of KPI’s (per region) with their projected values, defines sources of funds (the Regional Development Fund) and a government body responsible for implementation of the Strategy (Ministry of Regional Development). Now, the main issue is implementation of this Strategy because a similar previous Strategy adopted in 2006, although foresaw many progressive things, such as administrative-territorial reform, provision of more powers to the regions, development of regional infrastructure etc. was never implemented. The Strategy of regional development, naturally, does not touch the state-level issues, such as national security, law enforcement or external policy.

The second document, technically, is not a strategy because it contains mostly the measures to be implemented within the next three to nine months. However, some of these measures, such as deregulation, Naftogas reform or anti-corruption legislation, will have a long-term effect. Although the proposed measures are unquestionable, the plan does not provide either estimates of expenses needed for implementation of some of them (for example, for rehabilitation of wounded soldiers or help to refugees from Donbas) nor sources of these expenses. The strongest part of this plan is that it is being implemented. For example, the government already took some steps aimed at deregulation, reduced the number of state officials, developed some anti-corruption laws etc.

The third document tries to form a strategic vision for Ukraine until 2020. According to it, the goal of Ukraine is “European life standards and a decent place of Ukraine in the world”. To achieve this goal, 62 reforms and state programs are listed, of them 10 priority ones. It also contains the KPI’s which are intended to be achieved by 2020. Although the listed reforms themselves do not raise questions, their number is too high, and some of them overlap. In the future, this would complicate the communication between owners of reforms. The choice and proposed values of the KPI’s are also rather questionable. However, there is no other document trying to formulate an action plan for the medium term (let alone the long term), so this Strategy is a good starting point. Below I provide a few suggestions for improvement of this document. Please feel free to criticize them.

Strategy suggestions

First, we need to formulate the goal of the strategy, i.e. an answer to the question “Which state are we going to build?” “A European state” is a very vague formulation since European states are very different, and standards of life in them are also different -  there is no such thing as “European life standards”.

Basically, we have a line of models to choose from. On the right end of this line there is a “libertarian” or a “fishing rode” state (named after a famous dilemma of what to provide to a person – a fish or a fishing rode). In this state, the government is small, both taxes and social protection are low, and citizens are supposed to assume full responsibility for their well-being. Only those in a desperate situation are supported by the state. A good example of such a state is Singapore.

On the left side of this line there is a “socialist” or a “fish” state with high taxes and high social protection (all EU countries are more or less close to the left side). We can choose some place between these two extremes, but in any case this place should be clearly defined (see this post on the topic).

As a fan of an invisible hand, I would suggest a state close to the right end of the spectrum – at least until Ukraine is sufficiently rich to become socialistic. A “socialist” state is sustainable until the number of working people and their productivity are sufficiently high – so as to support not only themselves but also non-working people. If for demographic or other reasons the state provisions to non-working people become higher than contributions of working people, there are three possible scenarios – reduce provisions or eligibility (which leads to social unrest), increase taxes (which increases the share of non-working people) or borrow (which is unsustainable in the long run).

 So, the possible formulation of the 2020 goal could be “A business-friendly and equal-opportunity state”, and the quantitative aspect of this goal can be the “Doing business” rank (it is one of the few KPIs in the current version of the Strategy that does not raise questions).

Ukraine has always been characterized as a country with a big potential: indeed, we have a large and well-educated population, a good industrial base, fertile soil, more or less developed physical infrastructure etc. However, something has always prevented this potential from developing. I can think of four such factors (listed NOT in the priority order):

  1. Inefficient government.
  2. Inefficient use of natural resources.
  3. Inefficient use of human capital.
  4. Russia (this includes occupied territories of Donbas and Crimea, and a permanent threat to the rest of the country – not only military but also economic).

So, the list of reforms naturally follows from the need to mitigate these factors (see table below). Of course, this table provides the very general list of reforms. Each of them, as a nested doll, includes several other reforms. For example, the reform of state administration includes optimization of the government expenses, decentralization, deregulation, prevention of corruption, and transparency. In its turn, decentralization includes reforms of administrative structure of the country, of local self-government, as well as of budget and tax system. Some of the reforms overlap – for example, tax reform will be a part not only of decentralization but also of deregulation etc. However, in this post I present only the “highest” level of reforms and possible criteria for their evaluation.

Reform or a government program
Which problems does it solve?
Where to start?
Does it require additional financing from the budget?
Will it increase budget revenues?
How will society accept it?
Possible KPIs
Law enforcement.
This reform includes reforms of judicial system, police and prosecution office. It is absolutely necessary because however good laws we may have, if they are not enforced, they are just paper.
1, 2, 3
Adopt the new law “On prosecution”
Yes, but not much
Yes, almost immediately
Level of trust to police, courts, prosecution
Delinquency rate
State government reform.
This reform would introduce the chosen model of the state. The first step of the reform would be the definition of the state functions, and then – distribution of these functions between government levels using the subsidiarity principle. This reform includes deregulation and increased transparency of government decision-making.
Replace central and local officials  who discredited themselves. Publish drafts of documents of ALL government bodies, not only draft laws. Discuss   these drafts with stakeholders and civil society (on demand). Continue deregulation.
Yes, in the near future
Time needed to open a business or to file tax reports
Number of state officials per person
Share of local budgets in total budget
Level of trust to local and central government
Social security reform. This includes (1) monetization of privileges and transparent (for example, score-based) system of support of the poorest people; and (2) a developed system of adult education (so that unemployed people could gain new skills)
1, 3, 4
Audit of social security funds and Employment Service and publication of its results
Yes, but not much
After implementation, it will reduce expenses
Mostly negatively to the first part, positively to the second
Share of employed people in the working-age population
One of the poverty indicators
Privatization (including splitting state-owned monopolies, such as Naftogas, Ukrzaliznytsia, Ukravtodor etc. and selling their parts)
1, 2, partly 4
Start with Naftogas
Much more than expenses
Share of state-owned enterprises in the economy
Subsidies to state-owned enterprises
Reduction of state involvement into the economy: stop providing any subsidies, privileges and state guarantees to enterprises; develop a schedule for reduction of other forms of support (e.g. import duties)
2, 3
Stop providing any subsidies and state guarantees to enterprises
It will reduce expenditures
Volume of guaranteed state debt
Share of import tariffs that are higher than required by WTO or EU Association Agreement
Land reform: introduce agricultural land market
Finalize the necessary documents (such as land Cadaster) and cancel the moratorium on trade of land
Yes, not much
Yes, in a few years
Labour efficiency in agriculture
Volume of production of agricultural products
Energy reform: eliminate cross-subsidization and create competitive markets for energy; integrate Ukrainian energy system with the EU system
Implement the Third EU Energy Package
It will reduce expenses
Negatively in the short run
Energy consumption per GDP unit
Energy exports
Infrastructure development: new or renewed networks for transportation of heat, water and energy  would reduce on-the-way losses; better roads would reduce fuels consumption and CO2 emissions
Introduce necessary legislation to ease public-private partnerships and concessions in this sphere
Yes, quite much
In a distant future
Transportation losses of heat, water an energy (%)
Length of paved road per unit of territory or per capita
Waste reduction: encourage processing/recycling
Develop necessary legislation and provide a wide information campaign
Perhaps, not much but everyone will benefit from cleaner environment
Mostly positively
Volume of waste produced per year per capita
Volume of processed/ recycled waste
Continuation of education reform (secondary, vocational education) by raising teachers’ salaries and introducing more school autonomy;
reform of the Academy of Sciences
New law on secondary education
Yes, in the future. But this is a prerequisite for sustainable growth
Share of high scores in External Independent Testing
Rank in TIMSS or PISA survey
Number of publications in international refereed journals
Healthcare reform: universal insurance, probably  subsidized for poor people
Introduce greater transparency into the Ministry of Health, especially state purchases of medicines and equipment
Perhaps no, but nevertheless it’s essential
Death rates from or prevalence of specific illnesses, such as cardiovascular diseases or TB
Pension reform: introduce three-level system, increase pension age
Audit of the Pension Fund, publication of results
In the future, it will reduce expenses
Depends on age (the most negative – middle-aged people)
Share of spending on pensions in GDP
Relation between a median pension and subsistence level
A program for displaced people from Crimea and Donbas with the aim to help them settle in other parts of Ukraine, since this problem is a long-term one
3, 4
Already done – payments for renting of housing. The next step  - adult retraining programs (on the basis of the Employment Service)
Perhaps, in the future
Mostly positively
Share of displaced households with at least one working member
National security program:  join Action Plan with NATO; develop the army and Security Service
Start raising efficiency and patriotism of the Ministry of Defense and the SBU
Perhaps, it would lower losses
Occupied Ukrainian territory
Successful terrorist attacks vs  prevented ones


Of course, this is just a very raw draft, rather – a thing for reflection. Actual Strategy would probably be several hundred pages long, specifying the sequences of reforms, exact timelines and resources for their implementation and actual KPI values.

However, I would like to turn your attention to the third column – these are things that can be done today, even if the Strategy is not yet developed. Some of these things can be performed by the Cabinet of Ministers or the President without the parliamentary approval.

I think, now it is very important to show the commitment to implement changes, to make at least a few small steps in the right direction. And if some forces (for example, in the parliament) try to prevent reforms, the government can turn to the society and get all the support it needs (just remember how the new law “On higher education” was supported).

One can always find an excuse for not doing something. Now it is the parliamentary elections, after that the parliament will be busy with electing a speaker and distributing positions in the Committees, then there will be New Year holidays and so on. However, the country cannot wait. If the government does not introduce changes, maybe, it is easier to change the government?





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