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

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 tackle all of them.

In the last six months the government and the President talked a lot about reforms and presented a few plans for systemic transformations in the country. In this article I discuss these plans, trying to set up a framework for such a discussion, and make some policy suggestions. However, the main message of the post is that the absence of a completed and approved strategic plan should not be an obstacle for an immediate implementation of some obvious steps.

A strategy definition

A strategy is a multiple-step 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 6^th, 2014.
2. A plan for renovation of Ukraine presented on September 3^rd, 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 29^th, 2014.

Of the listed three documents, only the first one in some way includes all the four strategy 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 contained 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, many 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 right now. For example, the government already took some steps aimed at deregulation, adoption of the European standardization system, reduction of corruption 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, including 10 priority ones. It also contains the KPIs which are intended to be achieved by 2020. Although the listed reforms themselves do not raise questions, their number is too high, and many of them overlap, so it will be hard to clearly define a person or an institution responsible for each reform, and the communication between the owners of reforms will be complicated. 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 comment and 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 living in them are also different – there is no such thing as “European standards of living”.

Basically, we have a number of models to choose from. On the right end of this spectrum there is a “libertarian” or a “fishing rode” state (remember a famous dilemma of what to provide to a person – a fish or a fishing rode). 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 the spectrum 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 any 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 model close to the right end of the spectrum – at least until Ukraine is sufficiently rich to become socialistic. A “socialist” state is sustainable when the employment level and productivity are high enough to support both employed and non-employed people. If for demographic or other reasons the state provisions to non-working people become higher than contributions of working people, the system will sooner or later go bankrupt, unless cardinally reformed. In Ukraine, every 1000 of workers support 425 non-working people, and their number will increase to 600 in 15 years (according to the Demographic forecast), so current model of a “social state” is not sustainable, and we should move closer to the “fishing rod” strategy.

Thus, a 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, favourable geographic location, a good industrial base, vast natural resources, more or less developed physical infrastructure etc. At the same time, there is a number of factors which do not allow to untap this potential:

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). The reforms listed in the table are very general. 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 systems. Some of the reforms overlap – for example, tax reform will be a part not only of decentralization but also of deregulation etc. However, here I present only the “highest” level of reforms and possible criteria for their evaluation. The list is not complete but these are essential reforms that should be started immediately.

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	Positively	Level of trust to the police, courts, prosecutionCorruption perception index
Public administration 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.	1	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	Yes, in the near future	Positively	Time needed to open a business or to file tax reports“Doing business” rankCorruption perception indexLevel of trust to local and central government
Social security reform. Introduction of (1) means-tested benefit system (monetization of privileges) and (2) a developed system of adult education (so that unemployed people could gain new skills and return to labour force rather than become inactive)	1, 3, 4	Audit of social security funds and Employment Service and publication of its results	Yes	After implementation, it will reduce expenses	Mostly negatively to the first part, positively to the second	Share of employed people in the working-age populationOne of the poverty indicators
Reduction of state involvement into the economy. This includes (1) elimination of any subsidies, privileges and state guarantees to enterprises; (2) development of a schedule for reduction of other forms of support (e.g. import duties), and (3) privatization (including splitting of state-owned monopolies, such as Naftogas, Ukrzaliznytsia, Ukravtodor etc. and selling their parts)	1, 2, 3, partly 4	Stop providing any subsidies and state guarantees to enterprises	Yes (part 3)	Yes, a lot	Positively	Subsidies to state-owned enterpriseVolume of guaranteed state debtShare of import tariffs that are higher than required by WTO or EU Association Agreement
Land reform: introduce agricultural land market	2	Finalize the necessary documents (such as land Cadaster) and cancel the moratorium on trade of land	Yes, not much	Yes, in a few years	Positively	Labour productivity in agricultureVolume of production in agriculture
Energy reform: eliminate cross-subsidization and create competitive markets for energy; integrate Ukrainian energy system with the EU system	2	Implement the Third EU Energy Package	Yes	It will reduce expenses	Negatively in the short run	Energy consumption per GDP unitEnergy exports
Infrastructure development: new or renewed networks for transportation of heat, water and energy would reduce on-the-way losses; better roads would reduce transportation time and fuel consumption, and also CO2 emissions	2	Adopt necessary legislation to ease public-private partnerships and concessions; sell frequencies for 3G connection	Yes, quite much	Yes, in a medium to long run	Positively	Transportation losses of heat, water and energy (%)Length of paved roads per unit of territory or per capita
Waste reduction: encourage waste processing/recycling	2	Develop necessary legislation and provide a wide information campaign	Yes	Perhaps, not much but everyone will benefit from cleaner environment	Mostly positively	Volume of waste produced per year per capitaVolume 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	3	New law on secondary education	Yes	Yes, in the future. But this is a prerequisite for sustainable growth	Positively	Share of high scores in External Independent TestingRank in TIMSS or PISA surveyNumber of publications in international refereed journals
Healthcare reform: universal insurance, probably subsidized for poor people	3	Introduce greater transparency into the Ministry of Health, especially state purchases of medicines and equipment	Yes	Perhaps no, but nevertheless it’s essential	50/50	Death rates from or prevalence of specific illnesses, such as cardio-vascular diseases or TB
Pension reform: introduce three-level system, increase pension age	3	Audit of the Pension Fund, publication of results	Yes	In the future, it will reduce expenses	Depends on age (the most negative – middle-aged people)	Share of spending on pensions in GDPRelation 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 unlikely to be solved in the short run.	3, 4	Already done – payments for renting of housing. The next step – adult retraining programs (e.g. on the basis of colleges or vocational schools)	Yes	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	4	Start raising efficiency and patriotism of the Ministry of Defense and the SBU	Yes	Perhaps, it would lower losses	Positively	Occupied Ukrainian territorySuccessful terrorist attacks vs prevented ones

Here, I did not intend to draft a strategy for Ukraine, which would probably be several hundred pages long, specifying the sequences of reforms, exact timelines and resources for their implementation, and planned or forecasted KPI values. Rather, I wanted to show a possible approach for a strategy development.

But most of all, 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 them, for example, replacement of discredited state officials, can be performed by the Cabinet of Ministers or the President without the parliamentary approval.

At the moment, 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 recall the saga about pushing through the new law “On higher education”). However, the government that does not show the political will to implement reforms cannot expect to live a long political life.