Democracy Watch, 2011 - Issue 25
Ukrainian reforms: for the people or for the elite?
The new government brought in its wake the promise of 21 strategic reforms intended for immediate implementation. Despite a consolidation of power into the President’s hands and over a year in office only two of these reforms have been attempted, a new tax code and reform of the state pension scheme. Local and international experts are in unanimous the both of these reforms were forced through without the necessary refinements required to ensure that the Ukrainian people benefit(1). Meanwhile Ukraine still lacks innovation, modernisation and competition, all of which undermine the investment climate.
A stress test for the new government has been the adoption of the new Tax Code in December 2010. The promises to simplify business conditions did not correspond to the reality of the legislation, leading to the ‘Tax Maidan’ protest with thousands of entrepreneurs out on the streets; only to be quashed by the authorities. The Code is understood to have driven over 30% of business owners to close up shop, although many will find similar positions within the shadow economy. The number of newly registered economic entities has reduced by 60% since the new Tax Code was introduced. Currently around 400.000 small enterprises are on the verge of bankruptcy and the situation appears to be worsening(2).
The policy of the current government, as manifested in the new tax code, seem to be to manoeuvre small and medium sized business into such a tight corner as to risk extinction, whilst in Europe the SME sector accounts for the bulk of tax revenue. This issue has been attributed with the professional emigration of Ukrainians, worsening poverty amongst the population, rising unemployment and deepening budget deficit. By nearly every index, the Ukrainian economy continues to deteriorate.
Current deregulation efforts by the President only seem to produce an effect at the cosmetic level and do not reform the system as a whole. Meanwhile Ukrainian Deputies’ declared incomes are increasing year on year, demonstrating how political influence can benefit personal wealth. With this in mind the question of whose interests the new Tax Code was designed around becomes quite clear. With all Ukraine’s economic issues, the authorities are, at least vocally, denouncing the Double Taxation Treaty with the government of Cyprus - a legislative agreement with many loopholes that facilitate offshore Tax evasion.
The more recent pension reform, adopted in July by Verkhovna Rada, will come into force on the 1st of September, provided it receives Presidential approval. The reformed plan raises the retirement age for women from 55 to 60 years, the pensionable service was increased by an additional 10 years for women and men. The adopted bill also limits the size of the maximum pension to 10 times the minimum wage.
According to Sergei Tigipko, Deputy Prime Minister and Minister for Social Policies, the reform is tailored to the needs of Ukrainian senior citizens rather than the qualification demands of the IMF’s loan tranche. At the end of 2010 the Pension Fund deficit in Ukraine amounted to 37.5 billion UAH (over 4.5 billion US dollars). Many experts and citizens have been highly critical over the implementation of the new pension legislation, not least women of close to retirement age who have made a deeply negative appraisal of the strict standards for retirement insurance.
The President declared, at a press conference in July, that he sympathizes with the many citizens of Ukraine that will incur expenses as a result of the reforms. He also stressed that there will be no future without reforms. So far however, the reforms seem to only increase pressure on the poor, whilst the wealthy are free to get richer therefore we can only assume that the President has been given inaccurate data.
People First Comment:
2 out of 21 is not a good score by any stretch of the imagination. But what in reality did the President expect. He created a vertical power structure that has reduced the power of even his own party to nothing more than a rubber stamp, his team have bought off those oppositionists that were on the cusp and thrown into jail those that were inconveniently vocal. In addition the majority from his faction are far too busy making money to bother with passing meaningful legislation. You only have to see the extent of ghost voting to see that the majority of deputies don’t even protect the charade of an effective legislature.
The tax code followed on the promise by the President that he would liberalise the whole business environment. What came out was a new way of squeezing every last drop from private companies to feed promises made to the IMF but without the need for taxing those most able to pay. The business and international communities were ignored and the final draft written by former tax office officials who know little or nothing about running small companies but a great deal about protecting their own ill-gotten gains. The new election law was so badly flawed that the IRI and NDI withdrew from the consultative process as the final draft reads like a recipe for electoral manipulation and fraud. The same is true for the new retirement and pension’s legislation. It is badly considered, badly written and only serves the interests of a small elite.
There is a reason why western parliamentary democracy works and authoritarian post-communism doesn’t. In a democracy change happens because all those in parliament are fully accountable to their electorate and therefore have a personal responsibility to pursue a more effective and more efficient society. The debate is about the method, not about the principle. Authoritarianism on the other hand guarantees that only a small minority hold all the power and try to make all the decisions therefore there is no longer any real incentive for deputies apart from the lure of a financial return. Their power has been clipped therefore they quickly loose interest in government and resort to making money through their immunity. The result is stagnation and sadly that is exactly where Ukraine is heading.
Ukraine receives yet more warnings from EU and USA
The United States of America and European Union have again publicly expressed their warnings to the government of Ukraine over its anti-democratic internal policies. Steven Pifer, former United States Ambassador to Ukraine, stated that various political actions, particularly in the context of persecution of the opposition, violate the principles of democracy, further diminishing Ukraine's chances of successful admission to the EU and the support of Washington(3). Deputy Assistant Secretary of State Thomas Melia expressed concerns to the Ukrainian Administration over the lack of transparency brought about by the new draft law on the parliamentary elections. Freedom House and Atlantic Council have also criticised the government of Ukraine saying that the current policy of Ukrainian authorities is moving the country towards authoritarianism and kleptocracy with potentially dramatic consequences for the nation.
The European Union has also on many occasions expressed their disapproval of Ukrainian domestic policy, particularly in the wake of the criminal cases against former Prime-Minister Tymoshenko and members of her government. Regarding this, the European Parliament has approved a supportive resolution, and RACE has issued an official statement. With the warnings and statements piling up, the Ukrainian authorities wrongly believe that these are all just words. The alarm-bell actions of the Western community include the IMF refusing to give Ukraine another loan and the decreased likelihood of Ukraine signing agreements on free trade and visa-free travel as well as association agreement with the EU by the end of the year.
With so much at stake perhaps the President and his Administration should take the messages from Washington and Brussels a little more seriously.
People First Comment:
A new definition… Kleptocrat: A person paid by the state to work in the interests of the nation who considers it to be a ‘right’ to be able abuse his or her authority to ensure personal gain for himself or herself at the expense of the nation…
The whole administrative system of this country is infected with kleptomania. People actually seek jobs in public service not because they want to serve the interests of the people but because they truly believe that with authority comes the right to steal even if this means that the nation and their countrymen suffer. There is no comprehension of collective morality, public service or responsibility. It is dog eat dog where the higher you climb the more you can steal and it doesn’t matter whether you are in government or opposition or a kleptocrat. Why is their no public reaction… because a huge swathe of the population believes it to be normal and herein lies a national dilemma?
Ukrainians want to be taken seriously as a nation. They want to hold their heads high and be proud of their culture and history and they have every right to demand this. Yet at the same time a highly influential minority want the right to be able to totally undermine the whole basis of national statehood for personal enrichment irrespective of the national cost. It is not up to the international community to resolve this issue but it is beholden on every man, woman and child who wants to be proud of the nation of their birth to resolve this governmental conundrum as without a resolution the people of Ukraine are destined to remain as the ‘poor man’ of Europe and subject to the whim of unelected financial masters.
Ukraine is forever sliding into poverty
The Ukrainian people remain some of the poorest in Europe. According to the estimates of the Institute for Demography and Social Studies at the National Academy of Sciences of Ukraine approximately one quarter of the population lives below the poverty line. The fact that large families are the poorest of all is a direct threat to the stability of the nation. According to the United Nations, 80% of Ukrainians living in Ukraine are considered poor, as their daily income is less than 14 US dollars(4). According to another survey, 40% of Ukrainians have barely enough money for essential products.
In 2000 Ukraine subscribed to the United Nations Millennium Development Goals; one of which is the eradication of poverty and hunger. The Government of the time developed a strategy for overcoming poverty and a comprehensive programme to be implemented by 2009. Since then, the authorities have made no further actions or commitments on the issue of poverty. The population's income is considerably lower than the official inflation level of 9-10%. In 2010 alone food prices increased by over 30%. Unfortunately a lot of people with university qualifications and sustainable employment remain poor in Ukraine. Meanwhile the gap between the wealthy and the poor keeps widening. To illustrate this consider the fact that the total capital assets of a selection of one hundred Ukrainian oligarchs amounted to 66.5 billion US dollars in 2010. In the first half of 2011 they have managed to increase their wealth by one third.
The failure of the authorities to act will either lead to total social upheaval or pre-term elections forced by on-street democratic action.
People First Comment:
Some years ago President Kravchuk remarked that one of the dilemmas he faced when discussing Ukraine with international colleagues was that when he said that Ukraine was a rich country, his colleagues retorted… then why are your people so poor? When he said that Ukraine was a poor country his colleagues would retort… then how come you have so many expensive cars on your streets?
In reality both statements are true but it depends on your view point. Ukraine has more natural wealth than most of Europe in terms of human resources, mineral deposits, energy and agriculture but it has been hijacked by former apparatchiks and bureaucrats who have no idea how to commercialise what they have stolen hence in many areas production is pitifully low. On the other side the economic divide between rich and poor is now so wide that Ukraine actually has two societies of a super rich 2% and a super poor 75%. The 23% that happen to survive in the middle do so purely by tenacity, will power and dogged determination.
Current government policy would seem to be applying undue pressure on an ever decreasing middle class as the government tries to balance the books whilst doing nothing to stop the wholesale rape of the nation by those that enjoy immunity. This can only make the inequality of the system even worse to a point where soon Ukraine risks returning to the iniquity of the Tsarist era where the vast majority were expected to be subservient to the interests of the nobility. In the modern day example however the majority seem to be expected to serve the interests of a financial elite of only 2% and that is a clear recipe for revolution.
If the bubble burst then a lot of people will suffer with those from the government the most. Ordinary people will be put at risk due to the fault of both the government and opposition that has yet to learn how to conduct civilised political debates even after the Orange Revolution as Maidan achieved success because of the will of the people and not the abilities of its leadership.
Quote of the week:
The most important thing, in my view, was that democracy cannot be exported. It should be a product of internal development of a society.
President of the Russian Federation (2000-2008) and is the current Prime Minister of Russia
Democracy Watch is the weekly monitor of the People First Foundation and serves to raise public awareness of how government and parliamentary action is impacting upon Ukrainian democracy and democratic due process. The information is copyright free and may be reproduced but we ask that any comments are reproduced in full and with reference to the People First Foundation.
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