The “Miracle” Scenario, Foreign Aid, Delayed Reforms, and Tough Love

Gary Reusche believes that well-intentioned, but too liberal foreign aid, is also part of the problem


Foreign Aid and International Finance Institutions have been working in Ukraine since perestroika. Impacts from this support are measurable and significant. However, slow or incomplete legal and regulatory reforms significantly reduce the effectiveness of foreign aid.  The current dependence of Ukraine on foreign support creates a moral responsibility for the countries and programs involved to ensure that the reforms take place in a timely way.

In the mid-1990s, I read the book “Russia 2010 and What It Means for the World,” written in 1993 by Daniel Yergin (Pulitzer laureate) which described scenarios for the development of Russia after the collapse of the Soviet Union.  At the time I was a development worker in one of the first World Bank projects in Russia. Only the “chudo” or “miracle” scenario described in the book fit my motivations for working in development in the ex-Soviet space.  Twenty years later, I’m in Ukraine after the Maidan, still waiting for the “chudo”.

I am not a macro-economist, and don’t understand the passivity of Ukrainians in the face of openly practiced and frequently discussed corruption. From my foreign perspective, the social and economic effects of corruption are obvious in all spheres of Ukrainian life, affecting everything from schools, to roads, to SMEs, to salary levels, and much more.

As a foreign aid worker in the agricultural sector for most of the post-perestroika period, the cost of corruption, incomplete legal restructuring, and the occupation of government and parliamentary leadership by Ukrainians anecdotally interested only in their own self-interests, is beyond calculation in monetary terms. It would be more appropriate to calculate in human terms, the perversion of society through acquiescence to corruption, the loss of moral development of children and youth who don’t believe in the prospects for honest livelihoods, and so on, and so forth.

The “chudo” scenario of Yergin and Gustafson is still an option on the table. It is predicated on the fact that the post-Soviet world is populated with talented, motivated, creative masses that, if empowered by an enabling legal and ethical environment, will spontaneously create competitive businesses, pay taxes, and solve the numerous issues currently threatening the Ukrainian state. My personal experience as a manager in Ukraine has demonstrated to me that the “chudo” scenario is a real possibility.

The majority of Ukrainians that I know want reforms, but they are hesitant to believe that they will become reality. Perhaps this is due to past disappointments, past histories. The accumulation of excessive wealth, through questionable means, by a small minority after the collapse of communism, is not representative of Ukrainian culture in general. Thanks be to God, large numbers of Ukrainians reject such a characterisation, the Orange Revolution in 2004 and the Revolution of Dignity in 2013/2014 created an opportunity for them to overcome what I call a soviet-inherited stupor, and work for reform which will finally bring the “chudo” scenario.

I contend that all foreign aid programs in Ukraine are morally and objectively on the side of those who work to reform the legal and ethical basis of Ukrainian society. We can accomplish nothing without the full participation of reform-minded Ukrainians. The revolutions are Ukrainian, and well intentioned foreigners can morally and materially support, but not lead or sustain. Unfortunately, the money spent by foreign aid is often money wasted. I am not talking about money directly channeled or influenced by the so-called “rent seekers” which all international agencies do everything possible to prevent. Rent-seeking is a nice term for morally reprehensible behavior and here refers to the corruption of bureaucrats who solicit and extract ‘bribe’ or ‘rent’ for applying their legal but discretionary authority for awarding legitimate or illegitimate benefits to themselves or their associates. I’m talking about projects that come and go, provide the best expertise, both local and foreign, but the recommendations and even draft laws end up collecting dust on the shelf of a bureaucrat that has already moved on to new schemes. Obviously, not a very effective use of donor money no matter how hard the donors try to show impacts and results from the investments. If reforms were actually implemented in these development activities, then the effectiveness of foreign aid programs would be multiplied by many times, and the “chudo” could arrive.

Let me give a couple of examples to accent the point. Since perestroika, the credit union movement has been supported by the grass roots in Ukraine, and the donor community led by the Canadians, and Canadian diaspora. Other donors also believed in the value of credit cooperation, and the expected benefits— particularly for rural areas. Today, nearly 25 years after the initial efforts, the credit union movement can be characterised by legislative flaws and limitations, which reduces the possibility for credit unions to grow, and provide the necessary services. Proposals to solve these limitations have been ready for more than a decade. I have been personally involved with white papers, decisions of the Cabinet of Ministers, endless inter-ministerial meetings, draft legislation, and lobby in the Verkhovna Rada. The result of my efforts, the efforts of the teams involved, the millions of dollars of donor money invested was, unfortunately, a small fraction of what could have been done if the reforms were made. Now, for credit unions, I fear the reforms are too late, perhaps leading to the slow death of the movement.

An opinion published on VoxUkraine states “Slow Reform thus means No Reform”. So far, this is the case for credit unions.

I cite another example that I was personally involved with— agricultural insurance. Agricultural insurance is nothing more than good statistical data, honest contracts, reputable insurance companies, and effective regulation. Again, there has been over 15 years of donor support for agricultural insurance, including the World Bank group and the European Union. It is common knowledge that the problem is linked to the lack of legal reform to the Insurance sector in general. Although we see banking reform, insurance reform is lagging. Ukraine urgently needs a new insurance law to be enacted, one that approximates international norms, like European legislation. Only with such a law will consumers be protected, and the insurance industry could experience a “chudo”.  A new law on Insurance has been under development since 2007, and for a least 4 years a well-considered draft law, fully consistent with European legislation has been waiting for enactment.

With regards to agricultural insurance, it has been impossible to implement the necessary record-keeping and statistical databases needed to regulate agricultural insurance. Although a public-private partnership is the norm for agricultural insurance worldwide, the legal, regulatory and data systems, which are  ethical and corruption-free are not in place in Ukraine. For 10 years, donor supported projects have provided the best analyses and legislative drafts, even management information systems for the regulator and the Ministry, and, alas, we are still waiting. I have stated (and still believe) that Ukraine has the intellectual and IT capacity to have the best agri-insurance program in Europe and the first to implement agricultural revenue insurance in Europe (the most common insurance in the United States). But we are waiting for the reforms, and the necessary reforms are not coming.

Ukraine’s agri-exports are doing well, but there are development gaps. Agricultural insurance is linked to agricultural credit; it is part of the risk management for agriculture. Weather is always an issue, and both farmers and banks needs to plan for years that are sub-optimal. The so-called small and medium producers in Ukraine do not have access to credit. Part of the problem is the lack of collateral, and the direct negative impact on bank lending when the land cannot be used for collateral. Another part is insurance. They go hand in hand. No international competitor to Ukraine in the world market place is without the support of a good agricultural insurance system. Rural development in Ukraine is not complete without a strong, small and medium producer sector.

There is no reason excepted vested interests and corruption that explains why these problems cannot be solved. I hope that the donor community will stop accepting excuses for the lack of reforms, and the slow pace of change. My experiences, and the experiences of others, confirm the previous opinion in VoxUkraine, that “slow change” in Ukraine, means “no change.” Those vested interests and corrupt leaders use endless discussion and obfuscation as a strategy to block reforms.

I also believe that well-intentioned, but too liberal foreign aid, is also part of the problem. Why is the term “rent seeker” used to describe individuals that use their position to channel money and services to further their own interests? Would they not be better described as impediments to creating a new government culture in Ukraine where, instead of “rent-seekers” there are reasonably paid, ethical government servants— that actually serve the people of Ukraine and not their own interests. Today in Ukraine, there is a real opportunity and foreign aid is playing a major role because of the crisis. We see unprecedented statements from the American Embassy and the European Union targeting reforms taking too long.

The donor community and aid workers must not be part of the problem. There should be no compromise with principles and reform timetables. Most development workers and agencies accept the fact that change is difficult, and takes time. We know that project cycles are too short and corruption is hidden in the dark and behind closed doors.  But if there are delays, then there should be consequences. And, if the results are not forthcoming, then the support ends. This is what is called “tough love.” I believe the taxpayers in the countries providing aid, and hardworking and honest Ukrainians, would agree.

This is a continuation of the article “Why Ukraine Needs Quick and More Than Revolutionary Reforms,” by Tom Coupe, Olga Kupets and Maksym Sich

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