Achievable dream

Yuriy Kulikov
09:50, 25 May 2016
176 0
Opinion

Ukraine’s neighbor Poland for the first time in modern history is officially ahead of a Western European state in terms of the standard of living. According to the International Monetary Fund, taking into account the real purchasing power in 2015, the income of the Polish citizen exceeded that of the Greek by $6. The IMF predicts that by the end of 2016, this gap in the well-being of people living in these two countries will increase to $1,500.

In May 2004, when Poland joined the European Union, income per capita was at 49% of the average European income. Back in those glorious days, the Greeks, in addition to hosting the Olympics, rejoiced a 96% bar of Europe’s average income level.

Since that time, the Greeks have flushed their former glory and success into the toilet of world history because of the irresponsible moves of local authorities and their populism, as they showed an example of misguided economic policies. Meanwhile, the Poles have prospered, through hard work and perseverance in overcoming the pain caused by reform.

The IMF is among those who note the striking progress and astounding economic growth in Poland. The Fund expects that in 2018, this country will overtake another EU state – Portugal – in terms of gross income per capita, with the index of $30,692 against $30,134.

The IMF is among those who note the striking progress and astounding economic growth in Poland

Perhaps someone will say that this is such prosperity of Ukraine’s neighbors is a relative phenomenon, as Poland remains a country full of problems and contradictions. Yes, it is true, but no one can deny the fact of how much the country has changed in comparison with the times of food stamps and flea markets of the late 80s and early 90s.

At the time of the collapse of the socialist bloc, Ukraine's economy was comparable in size and potential to that in Poland, including comparable GDP per capita. Now our economies are players of different football leagues. The average salary in Poland is equivalent of about $1,300 while the Ukrainians get by with an average of $196.

What's gone wrong? I am sure that there is a different answer for every single reader. Some may name geopolitical reasons, and some – the quality of domestic policy, or consolidation of society around priority challenges. Poland immediately declared its intention to become part of a united Europe and a will to live by modern economic laws. Meanwhile, Ukraine, driven by self-interest of a few hundred people in power, rushed to create oligarchic capitalism and was too undecisive in choosing a path toward Europe or Russia, with the latter having taken advantage of our weakness, eventually stealing Crimea and launching a war in the industrial Donbas.

Poland immediately declared its intention to become part of a united Europe and a will to live by modern economic laws

The movement of both Poland and Europe toward each other was mutual. Enhanced with Poland’s sound economic policy, this led to an exemplary economic success story. Poland has done everything possible to show Europe and the whole world that this is a place worth investing.

For example, in 2014, the volume of EU assistance to Poland amounted to EUR 17.4 billion, while at the same time, the Polish contribution to the EU budget stood at EUR 3.5 billion. Total foreign direct investments made in the Polish economy stood at EUR 172 billion at the end of 2014. For comparison, Ukraine over all the years of its independence only managed to attract $42.8 billion of foreign investment, of which $10.9 billion came from offshore Cyprus, which was more likely the return of the funds earlier withdrawn from the country.

How can Ukraine change this karma? The recipe is simple: do not steal, do the right thing at the right time and do not succumb to the temptation of populism. The movement toward common economic sense should be comprehensive and focus on growth points.

How can Ukraine change this karma? The recipe is simple: do not steal, do the right thing at the right time and do not succumb to the temptation of populism

The key question, as always, is to find funding. And here the government of Volodymyr Groysman has to solve several tough challenges in cooperation with Parliament: to attract foreign capital, including through privatization of state assets, and to convince the Ukrainian oligarchs of the need to return to Ukraine the funds earlier withdrawn overseas. At the same time, the investors and donors must receive guarantees that the government will use all available resources and capacity to fight corruption and curb the appetites of the bureaucratic machine.

It is clear that the populists of all stripes will scream at all corners of “a sale of our Homeland for a pittance," but a clear priority of searching for effective owners and adjusted actions will help reformers prove their case. The neighbors in Poland managed to complete the privatization process in two waves, with peaks in 2000, when they sold state assets worth more than $9 billion, and a decade later in 2010 – worth over than $7 billion. The Ukrainian government remains too undecisive, once again postponing the sale of a power generating company Centrenergo. This time, until the first quarter of 2017.

At this, we can’t say that the Polish state has completely withdrawn fromn the economy. On the contrary, the active use of a "golden share" and other tools influencing the operations of Polish companies allows the government, to actively affect decisions in the corporate sector, if necessary.

Pension reform was always a success in Poland, as it gave an additional source of long-term funds for economic development. Legislation actively encouraged pension funds to actively invest in TOP-20 companies of the Warsaw Stock Exchange. Unfortunately, Ukraine is still far from creating such a model.

A consistent policy to reduce debt servicing costs would also help the growing Ukrainian economy. It was successfully launched last year by the then finance minister, Natalie Jaresko. The Polish case is a perfect example for Ukraine: given political will of the West, by 1993 Poland reduced the ratio of debt to GDP to 56% from 83% in 1990. The economy immediately switched to growth, and the winners were both creditors and grateful borrowers.

A consistent policy to reduce debt servicing costs would also help the growing Ukrainian economy. It was successfully launched last year by the then finance minister, Natalie Jaresko

Very important is the coordinated policy of the government and the National Bank on reducing inflation. With the last year's 48.7% boost in prices, Ukraine has become one of the world's outsiders. 15% expected in 2016 and a decrease to 11% in 2017 means the country is moving in the right direction, but this is still far from the Polish deflation of 0.9% last year and an expected decline in prices by 0.2% in 2016.

At the same time, Western economists expect growth of the Polish economy by a stable 3.6% over the next two years, which will repeat the results of the last year.

Ukrainian GDP in 2016 in the best case will increase by only 1.5%, and in 2017 – by 2.5% compared with a fall of 9.9% last year and 6.6% in a terrible 2014, marked by the beginning of war the annexation of the Urkainian territory. Over the past two decades, only a year of 2009 was worse for Ukraine when poor response of Yulia Tymoshenko’s government to the global crisis led to a drop in GDP by 15.1%. For comparison, in that crisis year, Poland's economy grew by 2.6% through effective policy of the authorities.

According to the forecast of the IMF experts, it will be only in 2021 when the Ukrainian economy could reach a 4% growth trajectory. Imagine, only then will be able to move away steadily from the 1991 level in terms of the economy volume!

According to the forecast of the IMF experts, it will be only in 2021 when the Ukrainian economy could reach a 4% growth trajectory

However, without proper and, unfortunately, painful steps to build a new energy independent economy with a focus on innovation, own production and development of the internal market, even this minimum task will not be achieved. So it is necessary to reject all doubts and start making the right moves no matter what the haters say.

Our western neighbors have managed to create a "success story"! So why won’t Ukraine follow in their footsteps?

Yuriy Kulikov

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