Unlike some of old Europe, Ukraine can fix itself

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February 5, 2015 by AK

Welcome to the most corrupt nation in Europe.”  I thought it was an article about Italy but since Ukraine and most of Russia, by population, are geographically in Europe, they’ve got to be the most corrupt. (Perhaps it was this introduction that got my rant deleted by The Guardian.) But I believe that Ukraine can reform itself to a greater extent than Italy precisely because Ukraine is on the brink of a total disaster, facing an acute, existential crisis. It’s a question of leadership now.

A successful reformer should be able to act as a democratically elected dictator for a while. Ukraine’s government seems to have a strong popular mandate but is procrastinating on economic reform like a bunch of myopic populists fearful of street mobs. Ukraine’s government spending was over 50% of GDP in 2014 and is budgeted to exceed 50% again in 2015. A poor nation like Ukraine cannot afford this. Germany and the UK spend about 45% of GDP.

Is military expenditure to blame? Sure, Ukraine plans to spend over 5% of GDP on defense this year, compared with 4%+ for Russia and 3%+ for the US. But it is not particularly high for a nation at war: military spending shot above 40% of GDP for both the UK and the US during WWII.

One huge problem is Ukraine’s state-owned oil and gas company, Naftogaz. It is chronically loss-making and the government keeps recapitalizing it in addition to subsidizing gas prices. Ukraine is blessed with plenty of conventional small gas deposits but output is not growing, despite the country’s life-threatening dependence on Russian gas.

Break up and privatize the bloody monster. Free gas prices. Cut down on the number of taxes and make them easy to calculate. VAT, royalty, income tax, nothing else. Give tax breaks to small gas investors. Abolish all subsidies except to the poorest and the disabled. It’s an emergency and there’s no time for social justice blather. Russia privatized its oil sector in the 1990s and output started growing in 2000 with the cumulative growth rate at 8.5% per annum in 2000-4. The reversal began late in 2004 when Rosneft started the Yukos asset grab and Gazprom followed up with its purchase of Sibneft in 2005.

Back to that piece in The Guardian. It’s a insightful article actually, explaining how good doctors in a severely underfunded system have to accept illegal payments from patients to keep things working:

“I have equipment worth millions, and I need to service it or it will break and my patients will die. I need to service it, but where do I get the money?” In other words, he had a dilemma: be honest and a bad doctor, or take bribes and be a good doctor. It is humiliating, but there is only one answer. “My doctors understand, and the patients pay,” Sidorenko said.

But if Ukraine cannot finance its health care system, it should stop pretending it has free and universal health care, a sort of Ukrainian NHS. Yes, fixing the heath system is much harder than privatizing Naftogaz: it’s virtually impossible. But at least, I hope Ukraine will avoid the Russian route, a bureaucratically convoluted middle road between the worst of “free” and “private” medicine.


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