Monday, 24 February 2014

On Governance, Institutions and Civilisation

Now that Yanukovych has fled - and good riddance to the thief - two huge question marks hang over Ukraine. The first is whether Russia will intervene - militarily or otherwise - to split Crimea and the Donbass away from the rest of the country. The second is whether Ukraine can lift itself (with the minimum of external support) out of its economic mire.

Regarding the second question mark, I'm minded of a 1989-era Polish joke: "There are only two ways in which Poland's economy will recover - the miraculous way and the normal way. In one, the Blessed Virgin Mary descends from heaven, raises up Her arms - and the economy comes right. In the miraculous way, Poles do it themselves. Twenty-five years on, the miraculous way has prevailed, albeit with some help from the EU and, well, let's face it, the miracle didn't work for everyone - especially the old and less-well educated.

For Ukraine to come right, a chicken-and-egg-at-the-same-time scenario is needed.

It is business that drives a nation's growth, not governments. Governments can spend taxes - wisely or otherwise - but the money has to be generated in the first place by businesses, making, selling, employing. Enterprising individuals, who can spot business opportunities, work hard, organise people and plan ahead properly, should be allowed by the state to get on with it. Without interference, controls, permissions - and an army of parasitical bureaucrats shamelessly poncing off their courage, vision and long hours. In return, entrepreneurs should behave ethically towards their suppliers, customers, employees and the state, paying promptly what is due, investing their profits in business growth rather than wasting it on gold statues of themselves, huge black SUVs and other show-off baubles.

At the same time, the state needs to rebuild institutions on the basis of trust and efficiency. A career in the public administration must not be about rent-seeking. And to minimise bureaucrats' opportunities to extract graft, regulations must be drafted by democratically elected law-makers which are clear, transparent, uniform across the country and simple in practice.

Ukrainian tax and business regulations are so Byzantine and contradictory, that it's impossible to do business 100% legally. This means that to secure that vital permission or official blessing, bribes needed to be paid, or your business gets closed down on a technicality. The entire Yanukovych model consisted of sitting at the top of the pyramid towards the top of which the stream of bribe money flowed.

I have two recollections to my first and to date only trip to Ukraine back in 2005. The first is the sight of mansions on the hillsides overlooking the Polish border. "Those are owned by the officers of the border guards and customs administration," said our guide. The second is of a huge black SUV with blackened windows front and rear - and windscreen too - on which was an official-looking p'yerepustka - or 'access-all-areas' pass. I asked our guide. "Government, mafia or business?" "All three," he replied, drawing a circle with his forefinger around three fingers of his other hand.

It is the disentanglement of business from the apparatus of state that's fundamental to the building of strong institutions. The Anglo-Saxon ideal of a young person choosing a career in business or in government, and keeping strictly on one side of that line, needs to be implemented to the east of the river Bug. At present in Ukraine (and Russia and Kazakhstan etc) if you have money, you have power. If you have power, you use that power to make more money, which you then convert into more power. The kick-backs have to go the other way too, to ensure the support of the security forces, media, and apparatus of coercion. And when, the Big Man at the top of the pyramid is not paying his thugs enough, they turn on him. This is the African model, where few post-colonial leaders have ever relinquished power voluntarily, and where many have left office in a box.

Ukrainians have rightly been demanding their right to live in a civilised state. The border between civilisation and the badlands has until now been Poland's eastern border. It is entirely in Poland's interest for that border to shift a thousand kilometres east, to have a civilised neighbour - well-governed, prosperous, stable and democratic - where young people can realise their dreams, be properly educated, and plan normal, stable lives.

For this to happen, Ukraine needs well-run institutions. Changing these will be incredibly difficult. Change has been happening in Poland at a pleasing pace, because of Erasmus students, EU-funded training, interchanges of administration staff, sharing of best-practice and European Directives impinging on Polish law. Without the benign influence of the EU washing over it, Ukraine will need to reconstruct its institutions for itself. A police force, not a militia, that neither asks for, nor expects bribes. An end to bribe-giving and bribe-taking by local authorities, hospitals and universities.

For the record, Ukraine is ranked 144th out of the 175 nations surveyed in Transparency International's 2013 Corruption Perception Index. Just above it are less corrupt places like Uganda, Cameroon, Central African Republic and Nigeria. Corruption generally follows opaque regulation, excessive bureaucracy and unpredictable business environment. In the World Bank's Doing Business ranking for 2013, Ukraine found itself in 140th place in terms of how easy it was to run a business. As a result, Ukraine fares badly in the UN's Human Development Index, (in 78th place) with only Armenia and Moldova doing worse among European nations.

Kicking out the corrupt officials, ending the bribe-taking and bribe-giving culture is one part of the chicken-and-egg conundrum. The other is meticulously drafted legislation, based on global examples of best practice, designed to simplify and limit the interfering role of the state, making it easier for people of good will to engage in business. Ukrainian law-makers should seek foreign advisors from places like Scandinavia, Canada, New Zealand, Singapore - exemplars of transparency and high human development.

Poland sincerely wishes Ukraine and its people well. Left: The Palace of Culture lit up in Ukraine's national colours - a symbol of the solidarity of the people of Warsaw with Ukraine. Even if it means greater competition for jobs (currently foreign investors have shunned Ukraine for its difficult business environment) and competition in terms of agricultural produce. Far more important is pushing back the geographical influence of the Kremlin.

I return to my first question mark. As I write, other than some empty rhetoric from Medvedev, there's been no official Russian reaction to Yanukovich's ignominious departure from Kiev. There are reports of hundreds of oppositionists being arrested in Russia, of a large public demonstration in Moscow, of militia roadblocks searching vehicles for tyres...

Tense times, I'm so glad that Poland is safely in the EU, safely in NATO. Poland needs to offer a helping hand to Ukrainians in terms of nation building.

A final note. Many commentators have compared the situation in Ukraine today with that experienced by Poland in 1989, and the collapse of communism. I say it's more than that - Ukraine is experiencing what Poland experienced between Martial Law in December 1981 and the Round Table Election of 1989 - in the space of one week rather than seven and half years.

This time last year:
"Why are all the good historians British?"

This time three years ago:
On the road to Węgrów

This time five years ago:
In the stillness of a winter forest

This time six years ago:
Over the fence


Alexander said...

Singapore is not a democracy.
And what happend to the security treaty between Poland,Lithuania and the Ukraine after Germany objected to NATO membership a few years ago ?

Regards, Alexander

AndrzejK said...

A key issue is going to be the true state of Ukrainian banks. This is an area where experience has shown that the free market does not work.

And in case anyone accuses me of statism may I say that I do not believe that any bank is too large to fail. If a bank gets into difficulty then the shareholders should lose their investment as a penalty for failure to ensure corporate governance. Just like any other business bankrupcy should loom and the more prudent will be able to pick up the bank assets and liabilties.

The governments role is to create a framework within which all players are equally protected.

Which brings me back to the Ukraine. How to achieve the squaring of the circle and ensure sufficient liquidity to allo businesses to flourish.

As an immediate clear singal to Putin all trade barriers and customs duties for Ukrainian exports to the EU should be abolished.

And the Polish government might care to introduce 100% first year capital allowances for Polish businesses investing in the Ukraine (just like Germany did for investment into former Comecon countries at the beginning of the 90's.