A Perspective on the Current Situation in Ukraine

By Roger Myerson (University of Chicago, 2007 Nobel Prize Winner)

In the Ukrainian crisis today, the important question is whether Ukraine will have an  opportunity to develop as a sovereign democratic nation. Questions about extensions of international alliances may be a dangerous distraction from this vital point.

Since the end of the Soviet era, the development of democracy in Ukraine has been frustrated by a unique and perverse form of constitutional centralization. Ukraine's constitution gives the president the power to appoint and dismiss all local governors. Such presidential power over local officials is extremely unusual among parliamentary democracies. This centralized control of local government has exacerbated regional tensions and hindered the development of trusted democratic leadership in Ukraine.

Democracy is about voters having a choice among alternative candidates who are trusted to exercise power responsibly. When such trusted leadership is lacking, democracy is inevitably disappointing and fragile. Although a presidential election can give prestige to its winner, it does nothing to develop the broader supply of trusted alternative candidates on which the success of democracy will ultimately depend.

NBU and Inflation Targeting: Monetary Policy Rules for the Road Ahead

By Alex Nikolsko-Rzhevskyy (Lehigh University, USA)

On July 3, 2014, in her speech at the conference titled “Ukraine’s European Vector: Impact on Business,” the National Bank of Ukraine’s (NBU) newly appointed governor, Valeriia Gontareva (Valeriya Hontaryeva in another transcription), underscored her commitment to targeting inflation. The current end-of-year inflation rate currently anticipated nearly 19% will likely prompt an aggressive tightening of monetary policy, thereby lowering inflation to more acceptable levels with the intent to then keep it under control. A reasonable inflation target could perhaps be in the vicinity of 4%, which though exceeding the more common long-term inflation targets of 2.0-2.5% exhibit by developed economies such as the U.S. and Canada, is nevertheless in the ballpark of peer and aspiring developing countries such as Poland and Hungary. As such, what exactly should the Ukrainian public and its economy expect to happen in the middle to long run? Putting yet-unresolved structural issues aside and assuming that immediate threats, including aggressive speculative attacks on the hryvnia, are defused, let us discuss the mechanics of the process of reducing inflation and various ways to mitigate the painful transition, using past international experiences as examples.

How Ukraine has lost the policy making capacity

By Anton Shevchenko (Ukraine)

Summary (by the editorial board of VoxUkraine)

Recently, the parliament passed a law that taxes several industries. The law attracted a lot of attention because of its controversy: the prime minister threatened to resign, and media speculated about a conflict within the government. The public perceives the law as a success for the prime minister and, more generally, the government in its fight with the oligarchs.   

This post argues that the law is ill-advised and counterproductive. The law taxes the very industires that have been the engine of the economic growth in Ukraine in the recent years and thus harms the ability of the country to resist the looming economic crisis. Furthermore, the law makes evident the time-inconsistency problem of the Ukrainian government policy, reducing the capacity of the government to influence economy and investors. Finally, it taxes industries not the oligarchs: jobs will be destroyed, investment in the infrastructure discountinued, the tax revenues will dry up, while the oligarchs will move away from developing healthy industries towards rent-seeking activities within the state.  

This law is an example of a myopic and non-systemic approach to reforms in the times of economic and political crisis, which may do more harm than good. 

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Imagine a country with a projected 6 to 10% GPD decline. Economists play football with arguments (here and here) discussing whether or not the country needs state-funded stimulus. And here the arbiter comes: the government files a bill with a proposal to tax five industries which were the engines of economic growth in last couple years. Yes, you are in Ukraine.

So, the Ukrainian government filed a bill to parliament in the end of July, with an aim to raise short-term tax revenues because economy slowdown and inability to reduce budget expenses were increasing state’s deficit. In the proposal, the government suggested to increase mineral extraction tax for natural gas to 70% (from 28%), to prolong indirect duties on grain export of about 20% (through non-refund of export VAT) for a year and cancel certain subsidies for agriculture (on average 5-7% of revenues) thereafter. Construction industry had to lose the ability to postpone income tax payments until real estate is completed, hotel industry was due to forget about its income tax break until 2020 (granted as stimulus before EURO 2012), green electricity projects were also losing their ten-years income tax break introduced just four years ago. All suggested tax policy changes were due to come into effect either on 1 October 2014 or on 1 January 2015.

Those Trucks Putin Sent To Ukraine With 'Humanitarian Supplies' Were Mostly Empty

By Paul Gregory (Hoover Institution and University of Houston)

What was supposed to be a PR bonanza is ending up as another black eye for Vladimir Putin, the heralded chess master of world politics. Did he really expect the world community to force Ukraine to allow in Russia’s gift of humanitarian assistance, no questions asked? Did he really think that Ukraine would allow his convoy to proceed into a war zone as cameras recorded the celebratory reception by starving and suffering civilians? Did Putin really not understand that national leaders look askance at attempts to cross national borders without permission? That is the International Politics 101 lecture that Putin failed to attend.

Has Ukraine lost modern media war?

By Yaroslav Markevych (Ukraine), Daryna Mykhayliv (University of Leeds), Oleksandr Talavera (University of Sheffield).

The power of mass-media has been widely recognized. Goebbels mentioned in his speech to Nazi party members in Berlin in 1928 “Propaganda is not a matter for average minds, but rather a matter for practitioners. It is not supposed to be lovely or theoretically correct. I do not care if I give wonderful, aesthetically elegant speeches, or speak so that women cry. The point of a political speech is to persuade people of what we think right.” Nowadays, distribution of news is almost instant, thousands of journalists look for sensations to attract wider audience of readers and watchers. Furthermore, the same event could be presented in a number of ways so that attitude of audience might be manipulated. This results in information wars in which different parties are fighting for influence over wider audience. Apart from the armed conflict, Ukraine and Russia have a fierce media war.

Economic activity brief: Agriculture

Oleksandr Zholud (Kyiv, Ukraine)

The agricultural potential of Ukraine has been recognized for ages. Indeed, Ukraine has all key ingredients to be successful in this area: fertile land, plenty of water, and mild climate. Many believe that agribusiness can be the next best thing in Ukraine, especially when Ukraine ratifies the association agreement with the EU. However, the recent track record of the agricultural sector in Ukraine is hardly impressive. For example,  productivity in the sector has been chronically low. This post briefly reviews challenges and prospects of the growth in Ukraine’s agricultural sector.

Inflation targeting – mission impossible?*

By Dmytro Sologub (Kyiv, Ukraine)

Fixed exchange rate regime has been the name of the game in Ukraine for the almost 15 years. But, no longer – the personnel changes in the National Bank in early 2014, coupled with the forceful breakdown of the exchange rate peg, prompted the radical shift in exchange rate policy. Namely, the new management of the central bank abandoned fixed exchange rate regime and declared the ultimate goal of introducing inflation targeting regime in the time frame of 12 months. This intention has been endorsed by the IMF and became one of the cornerstones of Fund’s US$ 17 bn bail-out programme for Ukraine.

One might argue that inflation targeting is not an appropriate monetary regime for Ukraine and it might be better search for other alternatives, ranging from currency board to the crawling peg. However, we believe that this discussion doesn’t make much sense at the moment for two reasons. First, the policymakers have already made a choice in favor of flexible exchange rate regime. Hence, to step back to any kind of fixed exchange rate arrangement doesn’t look really appropriate. Second, with the economy having experienced two severe balance of payment crises in 6 years it’s difficult to argue that the fixed exchange rate regime fits well for the country. Therefore, instead of again going through fruitless discussions on the most appropriate exchange rate regime for Ukraine, we suggest to concentrate on the question of what should be done by the policymakers to meet the IMF programme condition of introducing inflation targeting framework by mid-2015.

Georgia’s lessons from the reforms: Could they help Ukraine?

By Nickolay Myagky

It is widely accepted that Georgia has a good track record in carrying institutional reforms.  Fighting corruption was at the heart of these reforms. To illustrate that, Georgia’s percentile rank in the World Governance Indicators has improved from 7^th to 64^th in 2002-2012 for controlling corruption. The rank of Ukraine remained virtually unchanged during that period, being at 16^th in 2012 up from 13^th in 2002. Undoubtedly, Georgia’s experience could be very useful for Ukraine, and it is worthwhile to understand key ingredients of the successful reforms.

How can we ourselves improve the economic situation in Ukraine?

Tom Coupe (Kyiv School of Economics)

Whenever there is a new government, academics, experts and NGOs start writing reports on what the new government and the individual ministers should do to improve the economic situation in Ukraine and finally realize the Ukrainian economy’s full potential. This advice is typically well meant and to the point, however, it often does not reach or fails to convince the people to whom it is addressed. That, at least, is the impression one gets if one compares the reports that have been addressed to previous Ukrainian governments and what has been realized by these government.

Hopefully this new government will be more receptive to some of the ideas proposed but in spirit with the Maidan movement, it might be a good idea to not just wait for politicians to do something, but instead also let the men-and-women-in-the-street take the initiative. Here are some ideas on how non-politicians can improve the Ukrainian economy.

Ending the Russian-Ukrainian War

Volodymyr Bilotkach (Newcastle University, UK), Yuriy Gorodnichenko (UC Berkeley, USA), Tymofiy Mylovanov (University of Pittsburg, USA), Oleksandr Talavera (University of Sheffield, UK)

Millions of Ukrainians want to see an end to the Russian-Ukrainian war. In this post, we review some pressing issues in the East and propose a set of solutions.

Ending the war

• Buy loyalty of the indifferent, which is majority in the region, by increasing salaries of state employees and pensions by 20-50%, even if temporarily.
• Provide an exit option to the locals committed to insurgency by offering amnesty to those who were not involved in grave crimes (murder, torture, etc.), and stipulate that the amnesty will not apply to those who will continue to fight.
• Send a message that corruption is over by prosecuting most flagrant cases of local corruption, including new cases in the recaptured regions (e.g., abuse of the humanitarian aid), systematically firing corrupt officials and neutralizing their networks, and staffing the state offices with new people, loyal to Ukraine and the region.

Sustaining peace

• Rely on the middle class by helping them restart their businesses through tax forgiveness, cheap credit, training and capacity building.
• Create independent local media and activist groups from the pool of regional bloggers, volunteer networks supplying the military, local entrepreneurs and farmers
• Create jobs by employing locals in reconstruction projects, providing incentives for businesses to enter the region, and simplifying regulation for the small and medium size enterprises

The war will be over, one way or another, maybe as early as in a month. This will be a pivotal moment in Ukraine’s history but everyone should understand that the end of the war does not mean a lasting peace. The scars of the war are already running deep and the short-run problems (unemployment, shortages of essential goods, destroyed infrastructure) are likely to continue to alienate locals in the East to the new Ukrainian government. Without solving these problems, a new wave of violence may erupt.

Local Government Reform: Corruption and Accountability

By Donna Kim and Yuriy Gorodnichenko (UC Berkeley)

Robert Hawkins once said that corruption has been with us since the beginning of human organization but one cannot be complacent about corruption because it eats not only at the economic fabric of society but also at the moral foundations. It is hard to imagine that corruption is going to be eradicated completely but there is a simple set of rules that can minimize corruption. “Corrupt cities” is a wonderful cookbook of such rules. The guiding principle is that one can identify areas where corruption can arise and then prevent it.

Specifically, the book offers a simple formula: corruption = monopoly power + discretion of officials minus accountability. In other words, corruption is strong where an official has exclusive power to deliver a service (e.g. issue a permit), where he or she has freedom in interpreting facts and rules (e.g., there is no framework or formula for making consistent decisions),  where he or she does not report to anybody and his/her activity is not subject to the public’s scrutiny (e.g., all documentation is for “internal use only”). “Corrupt cities” presents many examples of how one can break corruption by a combination of simple policies that reduce monopoly power (e.g., use procurement or vouchers to obtain services) and discretion (e.g., minimize stages of decision making and simplify rules) and increase accountability (e.g., make hearings on key decisions public, publish reports about tenders, and use e-governance).

Internally Displaced People, Ukraine 2014.

By Oleksandr Talavera (University of Sheffield, UK)

How to help internally displaced people (IDP) is one of the key problems faced by Ukrainian government after Crimea annexation by Russia and fighting with separatists in Donetsk and Luhansk regions in Eastern Ukraine. This is a new problem for Ukraine as it never faced any war conflict in its modern history. At the same time a number of former Soviet Union republics faced this issue. For example, at least 34,900 IDPs, mainly from Chechnya and North Ossetia, are reported in Russia. 172,000 people were displaced in Southern Kyrgyzstan after the conflict between the Kyrgyz majority and the Uzbek minority in June 2010. The scale of the problem was particularly large in Georgia and Azerbaijan. After Karabakh war about 600,000 people were displaced in Azerbaijan which constitutes 6.2% of population. Moreover, about 5% of Georgians were displaced after conflicts in Abkhazia and South Ossetia.

Does Ukraine need a macroeconomic stimulus now?

By Dmytro Sologub (Raiffeisen Bank Aval, Kyiv, Ukraine)

First of all, I would say that for me as a person deeply involved into the analysis (and sometimes policymaking) of Ukraine's economy and financial sector for more than 10 years now, it was very interesting to get an outside view on the situation, provided by Yuriy Gorodnichenko. And I have to admit that indeed at the moment there is no much discussion on the stimulation of the economy going on. The policymakers and analysts are mostly focusing on short-term stabilization measures, like revising budget revenues and expenditures, improving Naftogas finances, stress testing the banking system, etc. At the same time, I would like to present several arguments why I see the massive fiscal and monetary stimulus problematic under current circumstances.

Planning for the post-Putin era  

By Stefan Siewert (Germany), Ph.D. 

How the Ukrainian crisis might look like in five years? We look at performance and identify most-probable growth trajectories for the EU, Russia and the Ukraine, analyze drivers, the internal logic of change and the influence of global trends when good or bad political decision-making by the involved parties disappears.  

A brief history of mortgages in Ukraine

By Sergii Meleshchuk (UC Berkeley)

On Thursday, July 3, Verkhovna Rada accepted the bill onto conversion of foreign currency mortgages into hryvnyas (286 votes for). According to the law some individuals can convert the dollar-denominated mortgage liability into Ukrainian currency preserving the interest rate but at exchange level effective on January 1^st 2014. The law was adopted at the third attempt, after Speaker Turchynov threatened to close underground exits from Verkhovna Rada so that MPs would have to face angry debtors who meanwhile demanded adoption of the law under the walls of Parliament. Those debtors suffered from the rapid devaluation of Ukrainian currency in the first half of 2014.  When UAH/USD nominal exchange rate plunged from roughly 8 UAH per USD to slightly less then 12, dollar liabilities denominated in Ukrainian currency increased by almost a half in nominal terms.  According to the new law debtors who made their payments on time and whose mortgage level is below 1 mln UAH can benefit from interest-preserving currency conversion of their loans.  This episode is the second currency crisis in the last 6 years; both had adverse effects on Ukrainian mortgage market, however, the main is problem high cost of funds for Ukrainian banks that makes hryvnia lending unattractive and makes consumers borrow in foreign currency.

Times Report Casts Shame on Obama's Handling of Ukraine Crisis

By Paul Gregory (Hoover Institution and University of Houston)

To the surprise of many, but not to those who understand him, Vladimir Putin has upped his aggression against Ukraine in the wake of the shooting down of MH17 by his separatist allies. (For a definitive account of separatist guilt, see AP What Happened: The Day Flight 17 Was Downed.) The Russian military is now routinely shelling Ukrainian positions from across the border, hoping to elicit a response so they can claim a Ukrainian attack. Russia’s drones are targeting troop positions. Even more sophisticated missiles are flooding across the border, ignoring the lesson of the Malaysian jet tragedy. Russian MIGs are shooting down antiquated Ukrainian SU fighter aircraft, depriving Ukraine of control of its own skies. (After shooting down MH17, a rebel commander called east Ukraine air space “our skies.”) Putin’s propaganda war continues unabated, spinning fantastic conspiracy theories and accusing Ukraine of war crimes as they fight back against professional Russian mercenaries. Russian state television informs its viewers that the true enemies are the United States and NATO. Ukraine is just a lackey carrying out orders from above.

Comments on anti-corruption effort in Ukraine

By Tymofiy Mylovanov (University of Pittsburg)

 

There is a broad consensus that corruption is the number one problem in Ukraine. This is a cross-cutting issue and no reform can be successful without eradicating or, at least, minimizing corruption. How can this goal be achieved? In my capacity as an economist with expertise in design of institutions and incentives, I would like to offer some remarks on the anti-corruption effort in Ukraine.

Responsibility for MH17 tragedy: The Good, the Bad and the Ugly

 

by Kateryna Dronova (Berkeley, CA)

On July 17, 2014 Malaysia Airlines Flight 17 (MH17) from Amsterdam to Kuala Lumpur was shot down with a (reportedly) BUK surface-to-air missile system in the conflict zone of the ongoing Donbass insurgency, killing 298 people on board. This is the world's deadliest aviation incident since 9/11. Immediately after the information supplemented with gruesome photos from the crime scene reached the media, politicians got engaged in the intricate game of finger pointing and making mutual accusations. Apart from major political players we have three figures facing each other with triggered guns and blaming each other: Ukraine, Russia and Donbass People's Militia. The tension within this triangle reminds of the famous movie scene. The key question are: who is actually responsible for this tragedy and who will be held responsible for the crime committed? Let’s have a look at each party’s legal position in our attempt to answer these questions.