Yale conference underlines necessity of institutional reform in Ukraine

by Yaro Bihun
Special to The Ukrainian Weekly

NEW HAVEN, Conn. - In order to become a full-fledged democratic state with a modern market economy capable of sustaining it, Ukraine must adopt important institutional reforms, ridding itself of some of the harmful remnants of the Soviet system as well as some new impediments that have evolved during the transitional period.

That appeared to be the general consensus at the April 24-25 Yale University conference on "Institutional Reform in Ukraine: Implications for Emerging Markets." The conference brought together more than 130 experts and other interested persons from the United States and Ukraine, including government officials, parliamentarians and representatives of the World Bank and the National Bank of Ukraine, professors of leading educational and research institutions, businesspersons, investors and students.

The fourth such conference in four years, it was part of the multi-year Yale-Ukraine Initiative established to enhance the study of Ukraine at Yale with funds from the Chopivsky Family Foundation.

The goal of the conference was to identify and analyze the institutional impediments in Ukraine's political, financial, economic, agricultural, legal and administrative systems, as well as to recommend solutions.

What could have been expected to be a theoretical, academic discourse from the outset was enlivened with dramatic news and current examples of problems: two days earlier, the head of Ukraine's Interbank Currency Exchange and former director of the National Bank of Ukraine, Vadym Hetman, was killed in Kyiv, which kept the current National Bank chairman, Viktor Yuschenko, from appearing as the conference's keynote speaker.

There were Cabinet changes in the agriculture and economy ministries in Kyiv during the conference, and Ukraine's former justice minister and conference participant Serhii Holovatyi lost his seat in the Verkhovna Rada when a judge unexpectedly invalidated the results of the parliamentary election in his Kyiv district.

Mr. Holovatyi, who did not know the court was even considering the case, learned about the decision while in New Haven and announced it during a panel discussion on legal reforms. (See sidebar on page 3.)

Of the more than 20 participants who presented papers and addressed the conference, some were more optimistic than others about Ukraine's chances of removing such impediments as excessive regulations, an outmoded bureaucracy, and organized crime and corruption that are strangling the development of a free-market economy in Ukraine.

"Birth pains of new nation"

The most optimistic appeared to be the former U.S. ambassador to Ukraine, William Green Miller, who filled in for Mr. Yuschenko during the opening session and was the honored speaker at the conference dinner.

He pointed out that Ukraine is going through "the birth pains of a new nation," starting from scratch in every aspect of its life. Those who refer to it as a "basket case" might do well to remember that the United States also was seen as a "basket case" in its early years - probably more so than Ukraine is today, he added.

"So, a temporary state of difficult economy at the beginnings of nations is something that the world has witnessed many times," Ambassador Miller pointed out.

He said that Ukraine is only halfway through its necessary and difficult transitional process, in which, in addition to its many problems, it has many great achievements - in human rights and nuclear disarmament, among others - which should be celebrated. He called Ukraine "the most important country in the post-Soviet world" in light of its crucial role in European security.

Ukraine's ambassador to the United States, Yuri Shcherbak, did not attend the conference, but in a greeting faxed to its organizers pointed out that a growing number of governments are realizing that their most effective role is not in directing but in refereeing their national economies. The government of Ukraine recognizes that its administrative structure has not been as effective as it should have been in implementing the president's reform program. The bureaucracy, he said, was more interested in pursuing its own agenda.

On this point he found no argument from Serhii Teriokhin, a member of the Verkhovna Rada and co-chair of the Ukrainian Institute of Civil Society. Unlike some Latin American and African governments accused of corruption, he said, "the most corrupt element in my country is not the governing clans or individual dictators, but the so-called 'medium tier of the administration,' which is the first to contact with the license or state-permit seekers."

"The first barricade"

It is the resistance of this bureaucratic elite, the "apparatchyks," that form what Mr. Teriokhin called "the first barricade" on the road to deregulation. Among the other "barricades," he said, are the central government's desire to create artificial monopoly markets that it can control, the lack of a clear distribution of power among the president, the Parliament and the Cabinet, and an inefficient budget system that results in a high level of government intervention in business activity.

Oleh Soskin, director of the Institute for Social Transformation, said Ukraine must make a number of major changes in what basically has been a colonial system in order to transform it into a system with a normal, modern market economy.

"First of all, we have to build an economic foundation that is based on private ownership - not monopoly ownership, but private ownership - that creates a strong middle class, which today is lacking in Ukraine," Mr. Soskin said.

He added that Ukraine also needs the formation of non-governmental organizations, which are essential to a democratic society, as well as sound political institutions.

The killing of Vadym Hetman, Mr. Soskin said, is related to the struggle over these changes between differing clans and power centers - especially in the fight over the privatization of large state enterprises, dealing with energy, metals, chemicals and, most important, land.

Hetman: "the first victim"

"This is what the struggle is about between the various political clans and financial groupings," he said. "And the first victim in this war, in the new post-election period, was Vadym Hetman," he added. "This is a very bad omen, indeed."

As things stand now, Mr. Soskin said, reforms are at a standstill and growth of private enterprise is "a fairy tale." He was not optimistic about future reforms in Ukraine, in light of the leftist gains in the Verkhovna Rada, where - with what he expects will be the cooperation of former prime minister Petro Lazarenko's Hromada Party - the left will control Parliament and block any real reforms.

In the conference session on financial institutions, Prof. Robert Kravchuk of Indiana University pointed out that with the growth of the shadow economy, which does not pay taxes, it has become clear that the government has been trying to balance the budget on the backs of state workers, pensioners and students. This is possible, he said, because of the lack of transparency in the budget process.

Because the oblasts and cities are dependent on the national budget, he said, budget shortfalls and cutbacks are undermining their development. And this, as members of other panels pointed out, has resulted in the reliance and expansion by local bureaucracies of their regulatory and licensing power in order to increase revenues - which, in turn, drives more enterprises into the shadow economy and decreases further national tax revenues.

In the panel discussion on investment, both Scott A. Carlson, president and CEO of the Western NIS Enterprise Fund, and Valerii Schekaturov, managing partner of the Ukraine Fund, whose firms have a number of successful investments in Ukrainian enterprises, presented a positive picture of the investment climate there.

Mr. Carlson said there is "a high margin for error" because there is little competition in this emerging market, but added that there is "no margin for error" when it comes to adhering to numerous government regulations.

He and Mr. Schekaturov pointed out that much attention also must be paid to selecting management as well as to training. Mr. Carlson found that the two most difficult things to do in Ukraine in this area is to train an effective sales force - you have to start from scratch - and to convince the personnel that "the customer is always right."

Unrealized potential of agriculture

Morgan Williams, president of the Ukrainian Agricultural Development Company, said that the agricultural sector, which has always been "ripped off" in the history of Ukraine, continues to have a great but as-of-yet unrealized potential.

He said he found it terrible to look at the best land in the world being worked by poor farmers all because they were working under the worst system in the world.

Peter Sochan of the Citizens Network for Foreign Affairs pointed to increased government control of various parts of agricultural production that keep that sector from developing as it should - by creating new monopolistic parastatals, controlling fertilizer and seed distribution, and fixing and manipulating prices.

Gregory Huger, who is based in Kyiv and directs U.S. Agency for International Development programs in Ukraine, Belarus and Moldova, said that agricultural land privatization is moving forward and undergoing "a historic transformation," although its ultimate success will not be easy.

The Ukrainian government, he said, needs to make some basic policy decisions that will take the government out of agriculture and marketing, and support private sector development and open markets.

Discussing needed reforms in Ukraine's legal system, Mr. Holovatyi said much has been accomplished in this area, especially with the adoption of the new Constitution in 1996, which he described as "one of the most progressive constitutions in Europe."

In a country where such concepts as "the rule of law," "division of power" and human rights were unknown, much has been accomplished, he said - with the help of a constitution that proclaimed a law-based state, human values, government guarantees of human rights, government checks and balances, and reduced the prosecutorial powers of the state.

No "public service ethos"

The areas that need attention are land reform, the budget and relationships among the local, regional and national governments. Among the stumbling blocks on the road to these reforms, Mr. Holovaty noted the lack of a "public service ethos" among public servants and the complete lack of interest on the part of the "post-Soviet nomenklatura" in any reform, since it profits under the current system.

Joining Mr. Holovatyi in the legal session was American University Prof. Louise I. Shelly, an expert on organized crime and corruption in Ukraine. The transitional period in Ukraine "is fertile ground for organized crime," she said. It has made inroads from the lowest to the highest levels of economic activity, and has become "a major impediment to the development of a market economy," she said.

The woman with boxes waiting at the train station, who is seen by some as the beginnings of commerce - albeit in the "shadow" for now - is really one small link in a chain of crime and corruption that runs throughout society, from high government officials to the policemen on the street who are paid to look the other way, to the ordinary citizen who buys the non-taxed product, she observed.

When Ukraine became independent it had no policy-making, legislative and regulatory experience and no political elite, said Bohdan Krawchenko, vice-rector of the Ukrainian Academy of Public Administration. And this has resulted in many major problems he and like-minded individuals are trying to resolve.

The current central government is fragmented, has too many ministries and, unlike most governments, has no policy-making capacity, he said. The central government must be reformed and its problematic relationship with the local governments must be resolved, Mr. Krawchenko said, suggesting that one way to solve the latter problem would be to strengthen the municipal governments and possibly do away with the oblast and raion governments.

Also presenting papers at the conference and taking part in the discussions were: Viktor Lysytsky of the National Bank of Ukraine; Alexander Pivovarsky of the Harvard Institute for International Development; Richard Shriver, chairman of CIME and partner in the Lviv Consulting Group; Petter Langseth of the World Bank; Andrew Stone of the World Bank; and Joel Turkewitz of the International Center for Policy Studies. Stephen Holmes of Princeton University and New York University presented the conference summary.

In addition to the annual conference, the Yale-Ukraine Initiative includes student and research fellowships, courses, student and faculty exchanges with Ukraine, a lecture series and library support.

Copyright © The Ukrainian Weekly, May 3, 1998, No. 18, Vol. LXVI

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