The Government is Moving in the Wrong Direction

Here's a good analysis of some of the problems here by James Sherr, Fellow of the Conflict Studies Research Centre, UK Ministry of Defense--James Sherr: the Government is Moving in the Wrong Direction "????".

What do you think about the possibilities of investments into Ukrainian economy after the Orange Revolution?

A few months ago, they were extremely bright. Now they are looking grim. There are three reasons for this.

First, the Kuchma regime was a system of power. In its cynical and deeply unsatisfactory way, it was predictable. President Yushchenko has not yet created a system of power — or, in democratic language, a system of authority underpinned by a coherent set of policies. The state leadership and government now comprise divergent forces with divergent ideological premises, and they are pulling in divergent directions. On top of this, personal agendas and power struggles seem, once again, to be taking precedence over compelling and urgent national interests. More puzzling still, the President has not used his authority to bring these forces to heal and put a like-minded team of reformers in place. He has been an inspiration, but I am not sure that he has been a leader. Inspiration is a remote and otherworldly quality. Leadership is a direct and practical quality, and it has not been in evidence. So, the considerable number of potential investors — not to say political decision makers and analysts like myself — who hoped that Yushchenko’s first 100 days would be like the first 100 days in Poland in 1989 have become disappointed, worried and disorientated. People do not invest when they are disorientated.

Second, the dominant tendency of economic policy is socialist, often crudely socialist — not necessarily in its intent, but in its content and consequences. If the President confuses leadership with inspiration, it is becoming more and more plain that the Prime Minister confuses leadership with control. And the appetite for control is visible not only in the macro economy, it is extending to the micro economy, with controls on prices of oil, electricity, meat and (to judge by the cumbersome and punitive tax regime) the way people decide to spend their money. If there is to be private (i.e. voluntary) investment in Ukraine, there have to be market incentives, along with the stable framework that makes these incentives meaningful. That means, first and foremost, respect for contracts and property rights, a predictable and impartial legal system and a uniform and enlightened tax code. With regard to every one of these essentials, the government is moving in exactly the wrong direction.

Third, politics — especially the March 2006 parliamentary elections — is trumping sound economics. It encourages populist measures, such as price controls and financially disastrous increases in social spending. These measures are counterproductive even in the short term, because it takes little time for ordinary citizens to discover that the consequence of ‘just’ prices is shortages (not to say black markets and corruption), and well before March 2006, they will also see that their higher pensions and wages are being eaten up by inflation. Politics also inhibits the President from intervening, because he fears that he needs Tymoshenko as an ally before these elections and possibly after them. Hence, some speculate that he is deliberately staying aloof so that she can fail — and so that she, rather than he, will be blamed. I hope these speculations are wrong, because this would be a cynical, not to say risky strategy, and it would not surprise me if the Party of Regions, rather than People’s Union Nasha Ukraina ended up being the beneficiary of it. And why has this happened? After the Orange Revolution, President Yushchenko had the authority to do exactly what he thought was right. Why has he not used it? However this question is answered, the message to investors appears to be: nothing will be decided before March 2006, so don’t invest now. Can the country really afford this?

There's more and it's pretty hard to disagree with.