We need a new version of our country. Former Minister of Economy about reforms

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Will Ukraine succeed in becoming a full member of the European Union in 5 years, why should we deny hopes for the Marshall Plan and start to build economic freedom? In the special project «Accents of your city», we discussed it with Pavlo Sheremeta, the former Minister of Economic Development and Trade of Ukraine, manager-economist, and founder of the Kyiv-Mohyla Business School.

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In your opinion, can war also be a certain opportunity for Ukraine?

Yes, although it’s a shame to say because this opportunity is bloody and very expensive. Still, this is an attempt to review everything we do. Despite the fact that we have a terrible hole in the budget… Yes, we are helped by civilized countries from the West and the East, but not in volumes capable of covering it.

I understand that the government is finally planning to cut the state apparatus in half. I don’t know if they will be able to do it (in 2014, we set a goal to reduce it by 20%, but it didn’t work out). If you automate the functions, prescribe them more clearly, then you don’t need so many civil servants, state universities and institutions. By the way, many of them were destroyed by the war, people left these cities – that is, there is simply no way to restore them.

Therefore, the war is an opportunity to review everything we do both at the state and personal levels. I think people have already started doing it.

In the strategic thinking which we preach and use, there is an «Eliminate – Reduce – Increase – Create» matrix. Asking yourself about this every day is probably too often, but it’s worth doing at least once a quarter. To think not only about what you increase and what you create next year (there will still be 24 hours and 7 days a week). If you want to create and increase something, you won’t do it until you eliminate and reduce something.

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When we work with companies, it would seem that the most difficult point is to think of what to increase and what to create. In fact, this is a small thing, because people are creative, have a lot of ideas, a flow of imagination, dreams. But then, the financial director or the minister of finance comes and says: «Super! But with what [money]?» That is, something must be reduced and eliminated.

Well, Putin took care of it, we didn’t ask him, of course. Now, we need to worry about what to increase and what to create. The decision on Ukraine’s candidacy for the European Union is also a new page, a good start. Although I am a little worried that the ruling elite may become complacent about their success. On the contrary, this is the beginning of a long road, where many things will need to be eliminated (corruption), reduced (excess costs), added (entrepreneurship, innovation). This is exactly what saves us and protects us in war. This is when our resources are much smaller than the enemy’s, but our innovativeness, initiative, and motivation are much greater. We need to recreate a new version of our country.

Does that mean there has to be some kind of shared vision that everyone agrees on?

No. Viktor Medvedchuk remains a citizen of the country, as far as I know. I cannot have a common vision with him. And this is not something that would be normal, but it’s a democracy. We should have an active 20-30% of citizens, and then, as always, people will follow the active minority. Already there you need to have an understanding of the main things. If we demand one opinion from everyone, it will not be a democracy.

Who will be this active minority? I hear a lot of opinions that now medium-sized, small businesses should become the agents of change...

Unfortunately, business has not yet become like that. If this happened, then we wouldn’t have to call on the president to change the chairman of the parliamentary committee on finance, tax and customs policy, who is «plucking the geese« [the current head of the Parliament’s Committee on the Tax Policy, Danylo Hetmantsev, compared the taxation system to «the art of plucking a goose so that it does not scream.] There would be a person who understands that plucking geese is the late Middle Ages. Modern thinking is how to increase the number of geese and how can geese increase their weight?

According to statistics, 98% of taxes in Ukraine are paid independently and voluntarily. If the tax office chases someone, it collects another 2%. Therefore, geese, according to the law, are obedient, share what the law requires.

There is a beautiful and true phrase: «power is not given, it’s taken.» If a business wants to have a pro-business environment, economic freedom, space for innovation, it must take care to create it.

You said that we have a long way to go to meet all the criteria and become a member of the European Union, but most Ukrainians believe that this can be done in a maximum of 5 years. Do you see the prerequisites to shorten this path?

I know of no precedent for this to happen in 5 years. The decision to join the European Union is both political and legal. In order for it to happen, it’s necessary to fulfill the «Copenhagen criteria», to fully harmonize the legislation. There is an assumption in Ukraine that we will be allowed to join the European Union without it. Knowing the European legal culture, I doubt it. They will not allow this, because later, it creates a massive problem for the European Union: 27 members will use the same rules and one country without rules – how could that be?

5 years is a very fast pace, I don’t know any country that would go through it so quickly. Current countries are candidates for membership in the European Union from 8 to 17 years old. Turkey has had this status for 50 years. This can be quite a long process.

What do Ukrainians imagine when they want to be in the European Union in 5 years? Do they realize that it is actually a set of rules? Are the richest businessmen, who earned their capital simply because they have monopolies and preferences in power, actually interested in this? After all, is everyone interested?

I don’t think that those who have monopolies, especially if they depend on the state, want to join the European Union. They understand that a competitive policy will come with the European Union. Our monopolists will not want this, as they did not want the open sky, many other competitive things in the country.

Small and medium-sized businesses that do not want to be under the pressure of monopolists and oligarchs, they should want this. The problem is that there are not enough of them in the country. With emigration, it will probably increase.

We know that there are countries that were not too optimistic and enthusiastic about this decision [granting Ukraine the status of a candidate for the European Union.] They can make an unprecedented decision (I don’t know if it will happen or not) that Ukraine or Moldova can be deprived of this status if they do not meet the requirements set by the European Union.

I am impressed by the idea that the greatest values allowing societies or countries to be more competitive in the 21st century are trust and educated citizens. How is it now in Ukraine?

We have already gathered for the fourth «Bayraktars» through Serhiy Prytula fund. Who knows him personally? Few people, but he is trusted by millions – without a single contract, invoice, receipt. These, I think, are quite phenomenal examples of trust.

Education is also important, namely raising children to be independent, as opposed to obedient. Because when education produces obedient citizens, it is still education, but not the kind that is needed for the modernization of the country.

Among other things, there is initiative, the desire to show it, a positive attitude towards competition. I think that the war had an effect on this – the trust of the «brothers» around me disappeared forever. There are competitors all around. From the West, too, they are kind, hospitable, and helpful, but with their own interests. And that’s normal, we will continue to compete with them. If we expect them to yield to us, then this is wrong.

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I think that the war leads to the rapid maturation of the country. We didn’t go through modernization in our time, as happened with Britain, France, the USA, Germany, and Austria-Hungary. It affected our lands a little, but not everywhere and not completely.

Why did countries decide to modernize? One of the symptoms is meritocracy, i.e. appointment to positions based on talent, not on origin: for example, it is better to have a competent sergeant than someone’s «son» who makes stupid decisions and leads to the death of his battalions and units. This actually started a great wave of modernization.

From what we see now, it seems that the approach of strengthening control, state participation in the economy is winning. To some extent, this makes sense, because there will be a lot of income from other countries that needs to be distributed.

I think not because of that. First, the state must be strong in war. I just finished Fukuyama’s latest book on the principles of liberalism. The number one principle is that the state should be not so much a strong state as a brave one, a skilled government is needed.

I think that, in addition to war, there is also an instinct for centralization, and it’s not needed everywhere. In the army – yes. It is desirable that there should be one, not many private armies. For example, where decentralization has taken place in local self-government, now there is no need to centralize anything, although I understand the instinct to fill the national budget.

Centralizing power to small dictators is not how we win. Because the little dictator is actually sitting in a bunker now, not in our country, and very often makes idiotic decisions, because he doesn’t even know the theory of war. He knows Soviet intelligence theory, fortunately for us. If decisions were really made competently there, it would be much more difficult with the power that is there. There, the decision is made by a small dictator who does not know the realities, theories, has his own wishes, which no one can challenge him later – and this is bad for them. I don’t want us to try this model on ourselves.

I am here a much bigger supporter of the principle and approach of the famous Chinese communist – let a thousand million flowers bloom. This is what we need in the economy.

Why do Marxist ideas of vulgar socialism remain popular among Ukrainians – that the state owes us all, let it provide everything needed for us?

This is an interesting question for specialists: historians, anthropologists, sociologists. In my opinion, this is because we did not have time to undergo modernization in its essential sense, which Western Europe and North America underwent in the late 19th and early 20th centuries. It just came to us, by the way, it did not even enter the Russian Empire – and it is now visible. The fact that it touched Ukraine a little is also visible.

I remember 20 years ago, there were joint seminars and events, and I said with European tolerance, unpretentiously in my speech in Russian: «I don’t know how you do it, but this is how we do it.» During the break, a girl from Ufa came to me and said: «You’re cutting the living!». But with what? I had tried to say it tolerantly. She: «Why are you separating us?» I think we’re just now beginning to understand better what’s on their minds. Why? Because modernization has not reached there. That is, human rights, democracy, human dignity, critical thinking, initiative, desire to achieve, individualism simply did not get there.

You often mention that the economy must be built on innovation in order to move forward quickly.

This is basic theory and practice, proven by numbers.

What should these innovations look like? What do they consist of?

An interesting question here is what society wants. Sometimes it wants analgesics in the form of Arestovych, and this can be understood. I hope that we have another audience that wants the real state of affairs, to understand and think about what needs to be done not only by the state, but also by you and me.

The Netherlands has decided that working from home is legal. This is a small social innovation: companies do not have the right to oblige employees to sit in the office for 5 days.

These innovations can be in different things. Regarding working from home: studies have shown that labour productivity increased at the start of the war. Why? Because we stopped standing in traffic jams for 2-3 hours every day: we worked during this time, studied or slept and then worked more productively. These are all innovations, and they push our development forward.

There is a great book about how innovation only works under conditions of freedom.

By the way, in this regard, I am optimistic about sanctions against Russia, but in a long-term way. In the short term, we see that they need to be strengthened, because the ruble rose, the interest rate fell, inflation fell, the trade balance grew significantly, because oil price rose. However, the fact that Russia is isolated from the civilized world, that 300 of the world’s most innovative companies have left the market, will have a powerful, long-lasting, correct effect on this country. This will work, because a country that is cut off from innovation cannot be a leader. Obama said that this is not a global leader, but a regional one, I don’t even know if they will manage to remain regional leaders. But these are their problems.

According to various estimates, up to 5 million people left the country, some of them apparently returning. As for labour migration losses, is it too much?

I have another figure of 7 million, of which 2 have returned. These are mostly women and children, and there are a lot of them.

In 2021, Ukraine already had, it seems, the lowest birth rate in the entire history of the country. These are working hands and brains.

Borders are now closed for men. It must be understood that some of the men will leave for their families as soon as they open. Let’s think about the way out, because this situation is so depressing that one can get lost and lose faith. We talked about what is necessary earlier – we need to create a dynamic environment in the country, dynamic development of business and economy, which will create new jobs.

I had an impressive experience when I wanted to understand the financial system of the city council, income, and expenses. I was introduced to employees, financial management managers. I have never heard such hatred towards entrepreneurs in the city where one of the largest markets of Ukraine is located. It’s an end-to-end thing. And then we ask «why don’t they come back». And where should they turn if these people are like jackals who want to grab you, pluck you and close your mouth so you don’t scream?

It seems to me that there is the inertia of Soviet times, when entrepreneurs were considered thieves, criminals...

Yes, or speculators. This is a criminal offence.

Overcoming the system is more important. This is an end-to-end system – from Kyiv down to the villages. I was told that an entrepreneur status was not registered in Brovarskyi district [of Kyiv], because the person was old in age. She is a citizen of Ukraine who wants to open a tent on the beach and sell beer! Does it matter what age she is?

Fukuyama has an interesting phrase that actually liberalism, the free market is more conducive to economic growth than just democracy. And this is a fact. It’s said that Singapore is a dictatorship, but it is also a free market.

I do not want to question the future of Ukrainian democracy. The tendency towards centralization worries me. Because the phenomenon is known – economic lack of freedom can eventually lead to political lack of freedom. Here we must not lose our gains and, on the contrary, expand this economic freedom.

There is no stock market in Ukraine. Marxists believe that this is because the government did not create it. The government has been creating it for 30 years, and it can’t complete that task. The stock market is created by people like Maciej Witutski [President of Polish Confederation of Private Sellers] and entrepreneurs from his association, because they need capital for business. Bank capital is expensive. Why do people go to the stock market? Because if you have a good business plan and you can submit it, then you can take cheaper funds. And we also go to the Warsaw Stock Exchange, because there is no Kyiv Stock Exchange, and we cannot go to the Moscow Stock Exchange (and this is correct).

The stock market cannot be interested in monopoly, corruption, because then everything breaks down.

Why is trust important? Because when you understand that this phenomenon works within institutions, then you can trust the share price, the financial report. If you will not believe, everything is falling apart for you.

Regarding the fall in revenues to the budget. There are various ideas, for example, to raise taxes, to collect them in full – we have actually already come to this. What happens to taxes in general?

It is an econometrically proven fact that trade promotes economic growth, while tariffs do not. Therefore, if you want to promote economic growth and trade, you need to reduce tariffs. Where to get money? Again, from more geese. If you have one, then you pluck one, and if there are a million of them, then you can even not worry too much: they leave the feathers behind.

The second thing is about defense. When returning to normal, peaceful conditions, we will still ask ourselves: what is there on the eastern border, who is there? We will make sure that little has changed. This means that there will be big expenses. We are being helped now. To be honest, these should be our expenses and these will be our expenses in the future, because at some point, especially in peacetime, the Americans will say: enough is enough.

In peaceful conditions, one must understand that these are mostly our accounts. So here, probably, there should be a social agreement based on some kind of trust: we develop, become millions, we grow these feathers because we want to live in protection, in safety. We understand that this is a function of the state, we give you this function, we pay for it, only you provide us with economic freedom, take these looters far away, put in their place people who understand in a modern way what these birds need in order for them to develop and grow. And that at the end of the month, they would pay the salaries to the workers, so that they would gain another part of the world market. That’s what innovation is for, because how are you going to get another part of the world market?

Incidentally, the Ukrainian market will be too small to ensure our defense. And then you begin to understand that we need lower barriers, tariffs, because then we will sell more of our products.

Many enterprises may go bankrupt in our country, because we are mutilated by the war...

This is the price of growth. Joseph Schumpeter, who initiated thinking about innovation, wrote his book «Theory of Economic Development» in Chernivtsi 110 years ago. He once called this process creative destruction. That is, it is a two-way process – the one who does not draw must leave room for the one who draws. Conditionally: if only those who do not withdraw remain, then this economy will collapse very quickly.

There is a role of the state here. Denmark has a good principle of flexibility and security. This is a country with a free market and economic freedom. For example, they say: if you want to fire an employee – fire him. If he can’t handle it and you can’t pull him up, it’s better to release him than to keep such people and die all together. We take him on for 6 months, retrain him for another profession and keep 100% of his salary for two months, then 80%, 60% and at the end of the 6th month we say: either you have already found a job, or you did not want to look, but we did everything.

Competition means that the worst must protect the market. If you do not withdraw and go bankrupt, then it is better to go bankrupt and drag the resource, your attention and time into other products.

Cashiers and drivers may disappear in the near future. Economists have a 50% chance of keeping their jobs, personal trainers in the gym have 97%.

It is useless to hope that someone will rebuild the country for us. This is money, let’s say, not of Biden, but of an American father or mother who will not buy a toy for their child and will give it to Ukraine. By the way, they are already doing it. Because if they don’t do it, then we are dead. And if we’re dead, it’s going to have bad consequences for globalization, the world order, etc., which is why we’re getting this help now. But there is also the American opposition, Trump, who is a strong candidate in the 2024 elections, says «let’s take care of schools first, and then Ukraine.» Now it looks like this opinion will get the majority in November, and what will happen in 2024 in the presidential elections – I’m afraid to think.

Yesterday, the head of the US central bank said that raising interest rates is likely to lead to a recession. Helping others when you’re growing 6-8% like the US and helping others when you’re down 1-2% are different things. Because American mom and dad will say that the child needs a bagel, which is very difficult to share, and the toy we’ve already shared.

What then to hope for? On your own resource! We do everything ourselves. It is the same in the economy – it will not be any other way. This is our country and our economy, we protect it, we need to raise it.

The Marshall Plan in 1949-1952 in today’s money is $170 billion, which was divided among 15 countries. [Ukrainian Prime Minister] Shmyhal has already said that he wants 500-600 billion dollars. Such countries as Germany and Britain received aid, which is expressed as a share of 2.5% of their economy. The Germans were given little, because it is an aggressor country, and the British had a stronger economy, the ratio still fell. Austria received significantly more – 14% of its GDP. This year, our GDP, roughly speaking, is 100 billion. 14% of the Marshall Plan in Austria is $14 billion.

Only US aid is now 54 billion, plus they add a billion or so every other week. That is, we have already been given more.

The light at the end of the tunnel is in Ukrainian investments and savings. The normal percentage of savings in the world is 25%, investments – 30%. And it is already 30 billion, while we are saving 13%.

This is happening because we have unfinished reforms, including pension reforms. What we will save – we will have in retirement. Until we are retired, this money can work for the economy. By the way, during the war, the British saved 50-60%, the Americans – 50%: they did not buy cars, many things were on vouchers, cards, because the money was needed for defense. This is called public savings. The problem is that in 2019, instead of giving economic freedom, we made a fiscalization, when it was necessary to reduce taxes, look at duties, excises, which they started doing this April – we were three years late. When you do the right thing, but at the wrong time, it’s also not good.

Reforms are also important in the fields of education and health care. The fourth thing is investing in your own business: it can grow, provide a pension and real estate for children.

We haven’t done enough. If we ensured political freedom, more or less built, although without a prosecutor, an anti-corruption system with difficulties, then it is easier. What we have not done, economic freedom in particular, is more difficult by definition, but it must be done. We cannot always hope that someone will always come to our rescue and help us, because they have things to worry about, their businesses, families, and pensions. Our neighbour from the east will always try where it’s soft.

Andrii Saichuk spoke

Text: Olga Katsan, translated by Vitalii Holich

Photo: Tvoe Misto/ Ivan Stanislavskyi

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