War Pushes Ukraine To Failed State
Here Are Four Steps How to Avoid It.
by the VoxUkraine Editorial Board, Hromadske International
What you need to know:
- Ukraine’s economy is doing terrible, with no prospect for recovery at least until 2016
- The total economic collapse of Eastern Ukraine, the country’s industrial and energy powerhouse is the biggest problem. Ukraine received a constantly rotting wound on the body of its economy.
- A panacea in this unique situation does not exist but there are four steps which should be done as soon as possible to avoid ‘failed state’ status for Ukraine.
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How bad things are?
The war against pro-Russian rebels eats the Ukrainian economy alive. Back in December Ukraine had entered the tumultuous period of the Euromaidan Revolution already experiencing a deep recession, the third in the last five years. But the following war with Russia-backed rebels in the economically vital eastern part of the country made things much worse.
The European Bank for Reconstruction and Development predicts a 9% slump for the Ukrainian economy in 2014, with a prolonged pain in 2015 and a 3% GDP contraction. The complete collapse of the Eastern Ukrainian economy is the driven force behind ongoing economic troubles, EBRD says.
In 2014 Ukraine’s GDP will fall 7 percent, prices will rise almost 20 percent, the local government and the IMF predict. Ukraine’s troubled hryvnia is continuing its free fall and now it is the second-worst performing currency in the world.
The Eastern War is also the reason Ukraine is experiencing the record drop in industrial output. It plummeted 21.4 percent year-on-year in August, the biggest slump since the global crisis of 2009.
Ukraine’s national statistics office said the main industries of Ukraine’s Donetsk region, one of the areas where the war is most intense, had suffered, with coal extraction down almost 60 percent and steel production down by 30 percent.
The gas war with Russia is the main concern. The Kyiv government admits that it doesn’t have enough fuel to survive the 2014–2015 winter. Basically, Russia freezes Ukraine into submission, as the Independent puts it:
An energy crisis, started when Vladimir Putin cut off the gas from Russia, has been severely exacerbated by the disruption of coal supplies. This country is facing the prospect of the grimmest of winters; the threat of cities starved of fuel for heating and delivery of food while, at the same time, facing artillery and air strikes.
Europe has experienced winter conflicts since the Second World War. But while the population of Sarajevo during the siege in the early 1990s was around 430,000, there are more than one million people living in Donetsk alone, along with 440,000 in Luhansk, and, on the edge of the battlezone, 1.43 million in Kharkiv.
The crisis to get worse if nothing is done
At this point we are talking already about long-run though still unannounced war with Russia on the Ukrainian territory with poor chances to put the situation in Donetsk and Luhansk oblasts under control of Ukraine’s authorities in the nearest future. In other words, Ukraine received a constantly rotting wound on the body of its economy. It will be killing the country slowly with very poor chances to fend off the smoldering conflict:
· military costs will be eating a large part of the government’s budget,
· the budget will suffer from subsidies to the region which will not be paying taxes and not supplying crucial raw materials (coal, mainly) to the rest of the country,
· expected boom of smuggling and drugs supply through Eastern Ukrainian territory with no functioning border, no mechanism of control, no instruments of influence.
The way out? Time to act
So recent events with deployment of regular Russian troops to help Eastern Ukraine separatists have posed for the Ukrainian society a critical question: How can the country survive and develop while having Donbas occupied and facing a permanent ‘‘frozen conflict’’ akin to the situation in Transnistria, Abkhazia and South Ossetia?
For sure, a panacea in our unique situation does not exist but below we suggest steps which should be done as soon as possible to avoid ‘failed state’ status for Ukraine.
Sharing military costs
With Russia deeply involved in the conflict Ukraine has poor chances to win. Ukrainian military spending was less than $2 billion in 2013 (about 1% of Ukraine’s GDP) while Russia spent more than $70 billion. This year the Ukrainian government planned to spend 1.3% of GDP on armed forces which is still too little to match the resources of the Russian army. Of course, Ukraine can spend more on its army and navy but then military spending is going to be a heavy burden on its economy.
Clearly, Ukraine needs military cost-sharing with Western countries. For example, NATO countries are committed to spend at least 2% of their GDP on armed forces. While each country’s force may be relatively small, the combine resources are huge in absolute terms. The combined defense expenditures of all NATO nations in 2013 amounted to $1.02 trillion; this is more than half of Russia’s GDP. In 2013, NATO had 3,370,000 servicemen; while Russia had about 766,000 troops.
The problem is that NATO is not willing to help with troops at this point since such a move might trigger a new wave of escalation. At the same time NATO’s supplies of military equipment and ammunition are critical for Ukraine. Given how slow and apparently corrupt Ukraine’s Ministry of Defense is, transferring foreign aid under supervision of reputable organizations and representatives of Ukrainian civil society may be a good idea.
Against this backdrop, the messages delivered during the NATO Summit in Wales are positive for Ukraine. NATO declared creation of trust funds (financial support which goes under supervision of donors). Ukraine was also promised supplies of ammunition and military equipment. If those declarations indeed implemented, Ukraine will be in a position to maintain long-run resistance preventing further Russian occupation of its territory.
Cutting staff of law enforcement bodies
Apart of legal nuances of law enforcement bodies’ reform, large-scale layoff from police was one of the main impediments of potential reformation process. Near 250,000 policemen are employed in law enforcement. This is clearly excessive. For example, the number of policemen per 100,000 people is 373 in Ukraine while only 292 in developed countries. For prosecutors the picture is even more dismal: 34 in Ukraine vs 9 in developed countries . All of them have negligible salary but because of sheer numbers they eat 7.8% of the state budget (in developed countries the share of the state budget spent on law enforcement is about 4%).
In the war context, the problem could be solved naturally. Instead of mobilizing fresh soldiers to army the authorities should reallocated those serving in policy to the National Guard while cutting permanently the size of law enforcement bodies. With external financial support, this reform will not lead to any social tension and the authorities will have an open way to rebuild Ukraine’s law-enforcement system completely.
Outsourcing judicial system
All improvements in the investment environment, property rights protection and deregulation are hanging on success of the judicial reform. Society does not believe to this branch of power and judges do not care much about earning the image of ‘fair arbiters’. Broadly speaking, this branch of power does not work as such. In this context any reforms are doomed to fail without rebuilding confidence in the judicial system promptly.
Therefore, maybe we should create a system of visiting foreign judges which will be running trials according to Ukrainian laws. This might appear to be a very radical solution but we simply do not have time for starting long-run judicial reform. Ukrainians trust foreign judges (otherwise businessmen would not resolve conflicts in international courts) and outsourcing judicial process to foreign reputable judges might give a start for renewing judicial system in the war context.
Strengthening protection of the poorest
Another crucial impediment for fast reform of economic system is Ukraine’s socialist approach in protecting poorest. Categorical privileges (i.e. based on social status) are a rudiment of Soviet times which allows many ways to abuse public funds. In Ukraine, the more you earn the more privileges and social assistance from the government you get. A recent study documents that out of 40 bln hryanyas (4 times the amount spent on the armed forces) Ukraine spent on social assistance in 2011 only a third was received by the poor (the poorest 20% of the population). Ukraine needs to make social support much more targeted: if one wants to have support from the state, she should prove that she doesn’t have other sources of living and her income indeed is low. Furthermore, many corrupt schemes will become ‘naked’ if social assistance system is based on means-testing (not on categories) and many reforms (like reform of energy sector) will have a green way to go.
Obviously, these four steps will not make Ukraine prospering in short-term future. Further reforms will be needed. To survive, the country needs resources to build an effective defense system. With an active war and economic recession, the options for finding resources are limited. Ukraine badly needs help from abroad but it does not mean that the country cannot cut waste and stimulate growth. Ukraine must do its homework, like changing the principles of social assistance, creating a fair judicial system, reforming police, among other things. Otherwise, the prospect of having Ukraine as a large “failed state” in Europe is very real.
