UARU
Eastern Europe: Escaping the Oligarch Trap
12 March, 2017

This Week: 

What lessons can Ukraine learn from "shock therapy" in Poland? Why is it that 25 years after the collapse of the socialist system, Ukraine's GDP per capita is almost three times lower than in Lithuania and Poland? How can Ukraine improve its performance and alleviate poverty?

About the guests:

Jakub Majmurek — political commentator, film critic, and art critic. He is the co-author of many books on film history, social and political philosophy. Majmurek is working on his Doctorate of political philosophy at the Institute of Philosophy and Sociology at the Polish Academy of Sciences.

Algis Krupavicius — Lithuanian political scientist, historian, Ph.D., President of the Lithuanian Association of Political Science. Lecturer at the Kaunas University of Technology since 1989.  Head of Politics and Government at Kaunas University since 1992. Lithuanian expert in the Scientific Council since 2004.

Tymofiy Mylovanov — Associate Professor of Economics at the University of Pittsburgh, Honorary President of KSE, Deputy head of the NBU council, co-founder of VoxUkraine.In 2014, Ukrainian Forbes ranked Tymofiy as one of the most influential economic thinkers of our time.

Hromadske’s Volodymyr Yermolenko joins experts from Lithuania, Poland, and Ukrainer to discuss these issues in this edition of the show.

The program “Oligarchs in Eastern Europe” deals with Poland, Lithuania and Ukraine, their common challenges and ways to solve them. This current issue covers economic and social issues. Why have Ukraine’s western neighbours succeeded in the 1990s and how can Ukraine catch up?

Reforms

Tymofiy Mylovanov: There are definitely people – and I might be one of them - who think, that bringing in foreign investment and other ways of influence, would be beneficial to Ukraine. And one of the arguments is that we have tried so many different things here over the last 25 years, that the downside risk seems to be limited. We have to do something we haven't tried yet. That's one argument. And the hope here is, that by bringing in foreign culture - foreign technology perhaps - but most importantly foreign corporate and political culture, we will be moving towards a more civilised way of building and conducting business.

Algis Krupavicius: Like all eastern European countries we have some nationalism. The difference is that we have kind of a synergy of foreign and local businesses in Lithuania. For instance we have very strong foreign banks. The telecom has also been privatised by a foreign company. But for instance trade chains are almost entirely Lithuanian. There is also not as big a problem with huge industries as in Ukraine. Also the size matters: in a small country reforms are easier to implement.

Jakub Majmurek: It was not just the opening of the market to foreign investors that created this nationalist reaction. I think more important is the hyperinflation of the early 90s. It affected incomes of many social groups, especially industrial and agricultural workers. That was even before the great privatisation which started in late 1990. It was already fuelling very strong populist reaction and Stan Tyminsky – a very shady businessman from Canada – was able to reach the second round of the Presidential election. This happened, because the prices were rising extremely fast; for the first time unemployment – which officially didn't exist throughout the communist period – suddenly appeared; incomes started to fall. For almost a decade we had a double-digit unemployment rate. This fuelled political reaction more, than the involvement of foreign investors.

Stefan Meister (expert in German Council on foreign Relations)- I'm a bit sceptical about shock therapy. We had a bad experience in post-Soviet Russia, where it just didn't work. I think it was a very particular situation in Poland after 1989. There was a consensus among the elites and society, that they want to have this change. It can also go wrong like in Russia, where you have poverty and a weak state. And I think that Ukraine is also in a situation, where everything has to be changed. And if you have shock therapy in this situation, you may lose the society and public support. It really comes down to how the people can be involved and how to give them an understanding of the matter. This why I don't think that shock therapy is the right way to do it.

Tymofiy Mylovanov: We all hoped for fast reforms. But they are not coming. It is good that some reforms are. The third government after the revolution is still maintaining the relationship with society as well as with foreign politicians and donors. I think we have to push forward. We have to protect what we got and most importantly we have to protect the people who carried these reforms.

Algis Krupavicius: You also need social support for every reform. Because if you don't, then you end up with another revolution. In Lithuania the political elite was looking for this support. They didn't always have it, but it has nevertheless been a central point.

Jakub Majmurek: It might be a kind of stalemate situation, because it is quite clear what you need to reform. With a polarised society it is very difficult and the costs of rapidly implemented reforms can be very high. They were high in Poland, where there was a strong consensus. I can't imagine the consequences in a polarised society.

Poverty

Algis Krupavicius: There are several. Economy of course, because capitalism produces social inequality. Governments have to find a way to introduce more social justice and equality – via taxes for example. From a political point of view we had very right wing reforms in the 1990s. After a period of reforms, you have to implement some reforms very fast – as for example privatisation. Nevertheless we have problems with poverty in Lithuania. Despite EU cohesion funds, there is emigration from Lithuania. Every country has its own problems.

Jakub Majmurek: One of the greatest problems of the Polish development model – which was applied after 1989 – was its dependence on low wages. Low wages were the most competitive thing in Polish economy for a long time. For some time it was able to produce wealth and mobilise some kind of resources. Maybe it was necessary in the transition period. But now the people are starting to oppose it very strongly, many are emigrating to developed western countries. In both relative and absolute terms wages and working conditions of even low-skilled workers are far better in Western Europe, than they are in Poland. This was a revolution against the model of development which was strongly based on exploitation of non-unionised and low paid workforce.

Tymofiy Mylovanov: I think it is correct that the top 1-2% of Ukraine have accumulated a larger share of wealth in relation to its neighbouring countries. I believe we have established in one of our projects, that the ten richest Ukrainians have about 20% of the GDP and this is more than in Russia, Poland and every other country close to Ukraine. Concurrently the same might be true for the poor. How to change that, is the biggest of all questions. I think one has to give people opportunities, especially at the lower end. Also we need to talk about social justice. Roughly speaking – and I am simplifying a lot – there are two types of justice: One is the outcome justice and one is the opportunity justice. In the changing world it is important that people have the opportunity to acquire skills, which make them competitive in the economic environment.

It is true today that in – let's say – Kiev you have companies which are struggling to hire people at European salaries, because there is no qualified staff. Labour force is very limited in terms of skills and many companies can tell you these stories. 

Oligarchs

Algis Krupavicius: Because the US are a huge country in which wealth and business are very concentrated. In Lithuania we have a discussion about the influence and role of oligarchs. On the other hand we have diversified businesses, a plural environment, we are not dependent on two or three business groups and people, who are not only influential in business, but also in politics, in media etc.

We have influential people, who have some power, some influence in media and can talk to politicians face to face. But our media is quite independent, at least for now. This is important, because oligarchs need concentration of power in at least three areas: media, politics and economy.

Jakub Majmurek: I don't think that we actually have oligarchs. If you look at the 100 wealthiest Poles, you can see that the share of GDP they accumulated is actually not really high. Not only in comparison to Ukraine, but also to Hungary for example or with the Czech Republic.

The model of Polish privatisation. Many industries were sold to foreign companies and also the fact that many Polish businessmen who aspired to become oligarchs, had to sell to the more powerful foreign bidders – mainly multinational companies - as a result of the open market. Apart from that, the relationship between business and politics was never as cosy as in Russia or Ukraine.

Tymofiy Mylovanov: What does it mean to be an oligarch? It is a vague definition, although intuitively I understand that it's a rich person, there is some unfairness towards the means of acquisition and maybe some influence on politics. It's not just concentration of wealth or resources. Because we don't call big foreign investors "oligarchs". Then there is the question: What do we mean by "de-oligarchisation"? These oligarchs have lost a lot of wealth in the last three years. Rinat Akhmetov's fortune has shrunken tenfold. In this sense there is a "de-oligarchisation" and some people might even say that a majority of oligarchs today are de facto bankrupt. That if you count their obligations, assets and expected revenues, they don't make ends meet. But if you talk about their influence on politics, I'm not so sure that a "de-oligarchisation" has happened.

Advice for becoming a successful Central and Eastern European country

Jakub Majmurek: There are different answers: There is the social democratic answer, which is putting the emphasis on the fact, that in order to escape from cheap labour economy, you have to strengthen the labour unions, the workers and stop cherishing the entrepreneurs. There is the other answer, which the Minister of Development – Mateusz Morawiecki – has given. And he is focusing on e.g. putting money from pension funds into the stock market, concentrating investments into few national champions. 

Algis Krupavicius: There is no single recipe. I guess every single country has its own...But looking on Lithuania I think that social justice is extremely important as is quality of life for the majority. There are many aspects and they are very country-specific I think.

Tymofiy Mylovanov: You gentlemen offered a macro-political perspective and I think You're both correct that there is neither a simple nor a single answer. In that sense I do not know what the macro answer for Ukraine is, because obviously Ukraine is surrounded by countries, which have used different models: Russia, Poland, Belarus, the Baltic countries, Turkey etc. All of those models worked better – in terms of GDP per capita – than Ukraine's. Moldova is an exception, but they also have a conflict. I sort of agree with Andrei Shleifer. When asked about Ukraine and what kind of reforms should be implemented, he answered: Put smart people in the right places and let them figure it out. This would be my major boost for efficiency on the macro level: put smart people into the government and don't block them, let them figure it out. But on an individual level I'll try what I personally can, to increase my quality of life, my family's; to improve my company, the people around me and hopefully those we can influence. I think competence, commitment to change, patience and perseverance would be the answer on the macro level.