By Anders Aslund
Wednesday, May 18, 2005
Ukraine's Orange Revolution was an exhilarating and joyful event. It was a classical liberal revolution for democracy and freedom and against corruption. Viktor Yushchenko became the democratically elected president, promising freedom from fear and corruption.
Alas, the new Ukrainian government of Prime Minister Yulia Tymoshenko, another revolutionary hero, has surprisingly opted for an economic policy that appears to be socialist and populist in nature. The results have been immediate: Last year Ukraine enjoyed economic growth of 12 percent; in the first four months of this year, the growth rate plunged to 5 percent, while inflation has surged to 15 percent. How could things turn so sour so fast?
The biggest blow to the economy has been the new government's foggy plans for re-privatization. During the election campaign, Yushchenko advocated the renationalization of Ukraine's biggest steel mill, Kryvorizhstal, to be followed by a new privatization deal. The goal was to undo the sale of the mill to Ukraine's two biggest oligarchs in a sweetheart deal last year. The new government quickly acted to recover Kryvorizhstal, but the owners have taken the case to the European Court of Justice, where the proceedings are expected to be prolonged.
For months top Ukrainian officials have discussed publicly how many flawed privatization deals should be reversed -- the possibilities range from 29 to 3,000 -- and how this would be done. The government is trying to recover many enterprises through the courts, and it has drafted a broad law that could undo much of Ukraine's privatization. The dispute can be settled only by the fractious parliament, which will need months to come to a decision -- if, indeed, it ever decides anything.
Meanwhile, the property rights of thousands of enterprises are in limbo. In Kiev, rumors abound that oligarchs connected to the old regime are trying to sell their enterprises to Russian business executives and are preparing to escape the country. Naturally, executives are cutting off investment, and economic growth is screeching to a halt.
To make matters worse, a new socialist minister of privatization has been appointed who opposes privatization in principle. She asked recently: "What is so bad about re-nationalization?" Tymoshenko concurred in a recent newspaper interview: "The biggest enterprises, which can easily be efficiently managed, must not be privatized, and they can give the state as an owner wonderful profits." This sounds like state capitalism.
The old regime doubled pensions, saddling Ukraine with the highest pension costs in the world as a share of national income. The new Ukrainian government has added to this excessive burden by raising state wages no less than 57 percent.
To finance these and other huge social expenditures, the government is scrambling to find more revenue. A lot of discretionary tax exemptions have, sensibly, been abolished, but the overall tax pressure has risen dramatically. Meanwhile, Yushchenko continues to talk about his plans for sharp tax cuts.
Incredibly, this new regime brought to power by the middle class and small entrepreneurs has abolished the simplified taxation that served those segments of society so well. The result has been that tens of thousands of small entrepreneurs have been forced to close their businesses, while others have fled into the underground economy.
Reformers have long demanded that the lawless tax police be abolished and that the tax administration be forced to obey the law. But Tymoshenko is cheering the tax police on and has declared that the performance of the regional governors will be judged by their ability to collect taxes.
Inflation is skyrocketing with increasing public expenditures. The predominantly Russian oil companies have increased their prices as world market prices have risen. Tymoshenko has imposed strict price controls on gasoline and forced the remaining state oil companies to deliver it at prices below market levels. Not surprisingly, oil supplies have declined, and gasoline shortages have erupted. She has also started controlling the price of meat, which has begun to disappear from markets. The price controls are accompanied by abuse of private producers and praise of state companies.
Tymoshenko does not talk about reform of state monopolies but instead about their reinforcement. In an additional effort to squeeze business profits and boost state re venue, she wanted to boost railway tariffs for metals by 100 percent, but settled magnanimously for a hike of only 50 percent.
The contrast between the declarations of the Orange Revolution and current government policy could hardly be greater. Curiously, this discrepancy continues. In an editorial on Yushchenko's first 100 days, the Kiev Post points out that "while Yushchenko is making grand statements abroad, the rest of the government does not seem to follow his lead."
The official justification for these populist policies is that they are meant to boost Tymoshenko's popularity for the parliamentary elections next March. Both Ukrainians and Ukraine's foreign friends need an explanation of what is going on.
The author is director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace.