On 2 February, the Radical Party leader Oleh Lyashko posted on his Facebook page an open letter, criticising the long-awaited memorandum of cooperation between Ukraine and the IMF. In a longer form, this text also appeared on Lyashko’s blog on Censor.net.
Before addressing his arguments in detail, we should thank the MPs for the creation of this document — even though we don’t agree with many points, the mere emergence of such text should be welcomed, because it touches on many complex issues, contains a lot of data and arguments, and thus raises the discussion to a higher level compared to the speeches of MPs in the Verkhovna Rada and in the media. We hope that other parliamentary fractions will also create similar documents, which will help understand their ideological views on economic policy.
Lyashko lists the following disadvantages of cooperation with the IMF:
It’s true that the IMF provides loans and not non-repayable financial aid. It’s also true that the Articles of Agreement of the IMF define three goals of the credits: debt repayment, replenishment of the central bank reserves, and financing the budget deficit. However, the reason the IMF is called a fund and not a bank is that its main objective is to prevent the crisis spreading from one country to another by covering the current account deficits. It’s necessary to clearly understand this.
Comparing the IMF loan with financial assistance to Poland or other EU Member States is like comparing apples and oranges. Ukraine is not an EU member state, and the protection of property rights and business conditions here are far worse than those in Poland. Therefore, we won’t receive any investments until we do our homework — stabilise the economy and create an attractive investment climate.
Moreover, the amount of funds allocated to Ukraine isn’t that small. The amount of funds the IMF can directly provide depends on the quota of each Member State in the Fund, which in turn indirectly depends on the size of the economy. Ukraine and Greece received the maximum allowable loan amounts — 800% of each country’s quotas. Also, it’s necessary to remember that the complete package of agreements on financial assistance to Ukraine was significantly larger — $40 billion, including the IMF loan, loans from other international financial institutions, and restructuring (with 20% cut) of the privately-held external public debt of Ukraine.
Figure 1. Principal payments and interest payments on external sovereign and quasi-sovereign debt based on liabilities as of the end of November 2016 ($ bn).
Source: IMF, Ministry of Finance of Ukraine, National Bank of Ukraine, Dragon Capital calculations
Moreover, the IMF loans are much cheaper than the cost of borrowing in the market for countries in crisis. It should be made clear that the IMF comes to the country in crisis, it doesn’t cause the crisis. The Fund acts as an ambulance, which is of no use to a healthy person but is necessary to a sick one. Just like a doctor to a patient, the Fund prescribes each country a bitter but necessary pill.
“[The increase of retirement age] is unacceptable from the social and demographic points of view, since the average life expectancy for males in Ukraine is 66 years only.”
It’s true that the average life expectancy in Ukraine is lower than in most developed countries. However, what matters isn’t just the absolute retirement age, but also the average life expectancy at the time of retirement and early retirement. Ukrainian women hold one of the highest places in the world for life expectancy after retirement. In 2012, it was 23 years, hich, according to Ella Libanova, Director of the Institute for Demography and Social Studies, exceeds their average employment record. For men, the average life expectancy after of retirement is 14 years, which is comparable with the same figure for other countries. However, in Ukraine half f the male population retire at 60, and the rest — at 40. Thus, the average retirement age is 55 years. ’s one of the reasons why pension spending in Ukraine is among the world’s highest — 16% of GDP in 2013. In 2016, the Pension Fund deficit was 84,9 billion UAH, or approximately 4% of GDP. Meanwhile, the pensions remain small.
Speaking against lifting the moratorium on sale of land, Lyashko threats with the danger of selling land for nothing “to foreigners and big landowners”. On the other hand, he provides data on the growth of agricultural output despite the moratorium.
First, agricultural land is not fundamentally different from other assets owned by many Ukrainian citizens, such as apartments. Why there’s no moratorium on sale of apartments? Moreover, even assuming the purchase of land by foreigners “for nothing” (now such purchases are forbidden by law), they will hardly move it out of the country, so the added value will be produced in the country. Furthermore, studies indicate that the main opponents of the sale are not owners of land shares, who should make such decisions. The experience of other countries with no restrictions on purchase of land by foreigners shows no dominance of foreign landowners.
Picture 2. Who owns the land
“The draft memorandum with the IMF refers to “removing restrictions in the Labour Code”, “limiting protected categories of employees”, “revision of the Labour Code to exclude strict rules”, and others.”
Explaining the unacceptability of such changes, Lyashko refers to the example of Britain in the early 19th century, where child labour was limited in cotton mills, which was the restriction of the free market. Comparing Britain 200 of years ago with modern Ukraine is incorrect. Britain moved from complete lack of restrictions in the labour market to introduction of the minimum restrictions. In Ukraine, the situation is quite the opposite — the labour market has been highly regulated since Soviet times (the Labour Code was adopted in 1972). Back then, the state was the sole employer, so instead of creating competition and improving working conditions it introduced more privileges for chosen categories of workers. The downside of this “super protection” of employees is unemployment (an employer won’t hire an employee who won’t be easy to fire in case of economic difficulties) and informal labour market — contract work or even verbal agreements — where workers are not protected at all. Moreover, due to the weak legal framework and total corruption in the judiciary, most restrictions of the Labour Code have no real effect.
In all socially oriented countries listed in Lyashko’s article (Norway, Denmark, Sweden, and Finland), labour law is much more liberal than in Ukraine. For example, they have no legally established minimum wage. They don’t have many other restrictions existing in our Labour Code, according to which it’s very difficult to fire an employee. However, the most important is that Ukraine shouldn’t be compared with developed countries with high income level, but with them at the time when their income level was comparable to the current Ukrainian one or to the countries with similar level of development.
The authors criticise reduction of the budget deficit at the level slightly higher than 2% of GDP, because it hinders soft fiscal and monetary policies. As an example, the authors refer to the US policy during the World War II when the significantly increased spending of the US government stimulated economic development.
Indeed, reducing public spending and deficit, at least in the short run, may reduce GDP. Negative effects of this decline were observed in Greece and were anticipated in Ukraine. That’s why today the IMF isn’t too strict on the possibility of temporarily high budget deficit during the recession, and much attention is paid to increase of spending efficiency rather than its technical reduction in all possible directions. The main problem in that it’s necessary to somehow finance the deficit.
There are two ways of financing a budget deficit — (a) selling state assets, i.e. privatisation, and (b) borrowing. We’ll discuss the first option below, in the section on privatisation.Read more
The authors raise two blocks of questions: first, whether it’s possible to achieve the proposed inflation rates (8%, 6%, and 5% in 2017-2019), and second, whether we really need such milestones — that is, whether low inflation will result in restraining economic growth.
Only time will answer the first question. It may be noted that even though in 2015 inflation was 43.3%, the National Bank managed to achieve its goal for 2016 — 12% (± 3 percentage points) — inflation rate was 12.4%. So, taking into account this experience, it’s possible to achieve results close to the goal (if there are no major negative shocks for the economy).
The second question is more complicated. Indeed, if prices grow faster than the target level, the NBU must limit money supply, which can lead to recession. A classic example are restrictions imposed by the Federal Reserve System headed by Paul Volcker in 1979-1983. In the 1970s, the average annual inflation in the US was 8.1%. To curb these lasting high inflation rates, the Federal Reserve System raised the federal funds rate to 20% in 1981. This led to the 1980-1982 recession, but after 1983 the annual inflation rate averaged 2.8% and never exceeded 5.4%. Such low inflation rate is a reason people in Ukraine and many other countries often prefer dollars to their national currency as a store of value. Moreover, there are many studies that indicate a positive impact of consistently low inflation on gross and direct investments, including foreign investments. Low inflation reduces uncertainty, extends the planning horizon, and allows for long-term investments.Read more
Describing a chapter of the IMF memorandum, which concerns reforms in medicine and education, Lyashko distorts statements, written in the Memorandum. In particular, he writes: “The IMF-Ukraine draft memorandum sets Ukraine’s obligations: “... we will speed up fiscal structural reforms, in particular, through healthcare and education reforms to reduce the size of the public sector.” In other words, the authorities promise austerity measures in medicine and education! Rather than rebuilding and developing them effectively, they will save on them. In fact, those who added it to the Memorandum are real mankurts!”
Figure 1. Expenditure on education in Ukraine and countries ─ new members of the European Union, the latest available data (Ukraine - 2016 *),% of GDP
Source: World Bank, State Treasury of UkraineRead more
The simplified tax system did greatly simplify rules of the game for micro and small businesses. However, there’s also a negative side — large companies started to use the simplified system to legally minimise tax, particularly in the retail, IT, and hospitality industries. If you look at the experience of other countries in support of small businesses, almost in all developed countries it is done through tax-filing simplification rather than a special tax status. If the goal is to preserve legal activities of micro and small businesses, it’s worth considering abolition of tax and tax-filing for businesses with small total revenue, as proposed in this article.
An export credit agency (ECA) can become a key element of the export promotion system, provided it won’t simultaneously become a source of additional risks: fiscal, financial, corruption, and so on.
The law, adopted in late 2016, raises a lot of questions, which have already been raised in an issue of the Index for Monitoring Reforms (iMoRe). The key issues are (1) taking the newly established state institution to support exports out of the reach of the laws governing all other financial and insurance institutions in the Ukrainian market, (2) a rather peculiar structure of the institution’s governing bodies, and (3) selective support, which is provided only to a few sectors of economy. Another question is the compliance of the law with Ukraine’s international obligations.
In its current form, the law creates additional budget obligations and, therefore, risks, which the IMF can’t ignore while working with the country.Read more
Recently, VoxUkraine published the editorial board’s opinion on the Ukrainian version of “industrial parks”, which is actually another attempt to distort rules of the game and “optimise” taxation for certain companies, just as it has already been with the free economic zones and territories of priority development. In the world, the main advantage of these parks is the easy access to infrastructure. The tax benefits, if any, are linked to specific quantitative indicators, such as creation of a certain number of jobs.
Once again, Lyashko argues that domestically produced gas should be sold to the public at “domestic” prices. VoxUkraine has repeatedly explained (for instance, here and here), hy different gas prices for different categories of consumers and cross-subsidies are harmful to the economy. Let us remind you that in 2014 the deficit of Naftogaz exceeded the deficit of Ukraine’s state budget, and now it is reduced to almost zero. The next step of reforming the energy market must be monetisation of the “energy subsidies” so that consumers are motivated to save energy.
It’s wrong to assert that people should receive “state” gas at special low prices. All Ukrainian citizens are indirect co-owners of the Ukrgazvydobuvannya (UGV), but not all of them consume gas. Even those who directly consume gas, do so in very different amounts — usually large houses (mainly owned by people with high incomes) consume much more than small ones. That’s why setting low tariffs for everyone means to support of [the rich] gas consumers at the expense of the rest of society — because losses of public companies are funded at the expense of taxpayers.
Gambling ban didn’t lead to its disappearance. Just as the alcohol prohibition in the US or prohibition of prostitution and drugs doesn’t destroy the “bad habits”, but only creates a source of income for shady dealers. If the ban worked, we would hardly see news about the closure of gambling dens throughout Ukraine — from Odesa to Kryvyi Rih to Lysychansk.
From time to time, the government announces the fight against gambling, but with little success.
Is gambling addiction a real problem? Certainly. It’s even introduced into he International Classification of Diseases of the World Health Organisation under the code 63.0. This behavioural disorder should be treated, just like alcoholism. However, for some reason, the authors don’t advocate for a prohibition law. Perhaps because they are familiar with its negative consequences. Threats of transformation of Ukraine into a fashionable rookery for foreigners are groundless — before the gambling ban there were no gamblers’ queues on the borders with Ukraine, and they won’t appear even after its legalisation. Legalisation of gambling provides state regulation and greater responsibility of the subjects of this business, because in the case of abuse they might suffer financial losses. And, of course, it will fill the state budget, not someone’s pockets.
The authors argue that:
Let’s take a closer look at these statements.
First, the question of the optimal share of government in the economy is ambiguous and depends on many factors — history, important resources, public policy options, etc. Today, the share of state ownership in developed countries varies considerably. Moreover, its cost is often a non-trivial issue, especially when it comes to historic buildings or national parks. In France, for instance, each of the 96 cathedrals were valued at €1.Read more
Authors: Oleksandr Zholud, Ilona Sologub, Olena Bilan, Veronika Movchan, Oleksandr Talavera, Alex Nikolsko-Rzhevskyy, Yuriy Gorodnichenko, Tymofiy Mylovanov