Ukraine Needs to Abandon its Soviet Thinking Once and for All

Ukraine’s reform efforts continue to sputter on without any transformative results more than two years after former President Viktor Yanukovych fled to Moscow. The economy’s basic problems have not yet been addressed. It is still bogged down in its Soviet past, with populist forces making illusory promises that appeal to many voters’ Soviet-era mentality. The result is corruption, inefficiency, a lack of investment and innovation, budgetary stress, inflation, and economic stagnation.

In order to experience transformative growth and prosperity, Ukraine must radically break with the past and the current populist mentality and embrace free market economic policies. Such policies are at the base of all of the successful transformations that have occurred in post-communist societies. In essence, what is required is a recognition of the state’s limited role and an agreement that individual responsibility and market forces will guide the economy.

This approach would require dramatic changes to many of the economy’s fundamental systems. For example, one change that has already been adopted is the switch to market levels for natural gas pricing. This policy is crucial for rationalizing energy consumption, decreasing massive budgetary supplements, stimulating new investment in production, and eliminating the corruptive arbitrage potential of a dual pricing system. However, it lacks broad support among the general public and is widely exploited by populist politicians who promise to revert to the Soviet pricing policies of the past.

Another area where free market economic policies could be highly beneficial is the privatization of state enterprises. Market economies generally resist using government-owned entities to conduct economic activities; government ownership can lead to the highly inefficient and corrupt use of public assets, inflated wage structures, inadequate or misdirected investment, and a lack of innovation. These symptoms are evident in many of the thousands of companies held by the state. The market solution is to privatize all enterprises not of core strategic necessity to the state, but public support is lacking, and populist or corrupt politicians continue to support the old Soviet system.

The communist or socialist approach also suggests that the state is responsible for pensions. In contrast, a free market approach followed by many Western countries entails a state-provided minimal pension based on a means test; individuals are encouraged, through tax breaks and employment benefits, to top up the minimal pension with private savings. This approach places responsibility on the individual and provides a pool of private savings that can be used to finance private sector investment. Ukraine’s pension fund has promised benefits well beyond its capability to pay and is running an unsustainable deficit; a free market system, with an increased age of eligibility, would be a great advantage to the country.

Another area of the economy that needs to be brought out of communist thinking is healthcare. Based on Soviet practice, all medical services are to be provided free of charge by the state. In practice, Ukraine’s government does not have the fiscal means to fulfill this promise, and the health system cannot adequately pay doctors and other health workers. Consequently, the system is riddled with corruption; “voluntary contributions” are demanded of those in need of services. A market-oriented system would use a health insurance approach to provide healthcare. People with low incomes would be provided with basic insurance by the state, while others would pay for health insurance to meet their needs. Hospitals and healthcare providers would then receive funding for services through the basic public or private insurance. This would force the system to compete for clients through improved service, eventually eliminating low-quality providers.

Similar market-based approaches can be adopted in many other areas of the economy, such as agriculture, higher education, and transportation. In all cases, the goal is to provide price signals that enable the market to function properly. Government budgets would be relieved of the overwhelming cost of meeting impossible promises. At the same time, the reformed areas would operate more efficiently and with less corruption.

Unfortunately, no major political party in Ukraine has had the courage to openly disavow the Soviet system and embrace a free market philosophy. (The new Democratic Alliance party leans in the right direction, but it has no proven track record.) While decades of Soviet rule and a continuing Soviet mentality make such reforms difficult to introduce, heeding the hollow voices of populist politicians will only leave Ukraine mired in inefficiency, corruption, and stagnation.

Basil A. Kalymon is Professor Emeritus at Ivey Business School, University of Western Ontario, Canada.

Image: A boy jumps over a puddle near Soviet-era hammer and sickle sculptures at a residential sector in Mariupol, a city on the Sea of Azov, eastern Ukraine February 3, 2015. REUTERS/Gleb Garanich