The Correct Way to Rebuild Ukraine

Even though foreign aid is not an effective way of promoting prosperity, Ukraine’s government almost surely will be showered with money when the war is over.

To make these handouts helpful rather than harmful, aid should be conditional.

These remarks are from the Q&A section of a panel discussion in London, hosted last month by the Ayn Rand Centre, as part of the Free Market Road Show.

I was giving a spur-of-the-moment response to a question, so I want to take this opportunity to augment my answer with some hard data.

Let’s assume that American politicians do the right thing (yes, I realize that’s unrealistic) and they tell Ukraine’s politicians after the war that they can have billions of dollars to rebuild their economy, but only if they get rid of the statist policies that have been holding back the nation’s development ever since the collapse of the Soviet Empire.

As I noted in the video, this doesn’t have to be complicated. Ukraine can simply copy some of the better laws that exist in other nations.

And to make it very simple, we can even tell them they can choose from the policies of nations that are part of the European Union, which is an entity that Ukraine almost surely will want to join.

If we insist on that requirement, Ukraine instantly would become the world’s 3rd-freest country.

All of this is based on data from the Fraser Institute’s Economic Freedom of the World (by the way, apologies for mistakenly stating in the video that Ukraine was ranked #122).

P.S. Some policies are easier to copy than others. Simply copying Danish laws on property rights, for instance, would not automatically create the Danish political culture that makes corruption so rare. That being said, shrinking the size and scope of Ukraine’s government will dramatically reduce opportunities for corruption.

P.P.S. Regular readers won’t be surprised to see that Denmark leads in two of the five categories.

P.P.P.S. When Putin is finally forced from power, everything I wrote above also will apply to Russia.

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Can Economic Aid Help Ukraine?

Regarding Russia’s reprehensible attack on Ukraine, I’ve written three columns.

• Russian oligarchs don’t deserve much sympathy because they got their riches through cronyism rather than capitalism.
• Western nations should weaken Putin by opening their doors to young and educated Russians who wish to emigrate.
• Russia is being hit by sanctions because of the long-standing recognition that trade restrictions weaken a country’s economy.

Today, let’s address the topic of foreign aid for Ukraine, specifically whether American taxpayers should help restore that country’s economy once the conflict ends.

I’ll start by recycling an observation I made back in 2014, which is that Ukraine has been an economic laggard because of statist economic policies.

More specifically, I compared Poland (which has engaged in substantial liberalization) and Ukraine (which has not) and showed a growing gap between the two nations (another case study for the anti-convergence club).

Now let’s look at some updated data from the latest edition of Economic Freedom of the World.

As you can see, Ukraine is a cesspool of statism, ranking a miserable #129 out of 165 jurisdictions.

That’s lower than Russia, which is #100.

And the same is true if you look at the latest edition of the Index of Economic Freedom, which ranks Ukraine #130 and Russia #113.

At the risk of stating the obvious, giving economic aid to Ukraine would be flushing money down the toilet.

Unless, of course, western nations such as the United States somehow made aid contingent on sweeping economic liberalization.

We know what works. Don Boudreaux, Deirdre McCloskey, and Dan Hannan have all explained how Western Europe and North America became rich in the 1800s and early 1900s with the tried-and-true approach of free markets and limited government.

Even a curmudgeonly libertarian like me would relax my long-standing hostility to aid under those conditions.

The odds of that happening, however, are slim to none. And I would put my money on none, as explained by the “Foreign Aid Paradox.”

P.S. Some people incorrectly claim Western Europe recovered after World War II because of government aid (the “Marshall Plan”). The real credit belongs with people like Ludwig Erhard.

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Ukraine’s Self-Imposed Statism Crisis

Using a comparison of Jamaica and Singapore, I recently argued that growth should trump inequality.

Simply stated, a growing economic pie is much better for poor people that incentive-sapping redistribution programs that trap people in dependency.

In other words, nations with smaller government and less intervention produce better results than nations with bloated governments and lots of meddling.

You see that relationship by comparing Jamaica and Singapore, and you also see it when examining other nations.

This is fresh in my mind since I just spoke at the Kyiv stop on the Free Market Road Show.

I told the audience about the reforms that Ukraine needs to strengthen economic performance, but I probably should have simply read what one expert recently wrote about Ukraine and Poland.

Here’s some of what Allister Heath had to say for London’s City A.M.

In the dreadful communist days, Ukraine and Poland used to be equally poor. The former was part of the Soviet Union, and Poland was one of the USSR’s satellite nations, belonging to the Warsaw pact. In 1990, both countries had roughly the same GDP per capita – their economies were eerily similar. A quarter of a century later, everything has changed… It’s a tale of two economic models, and a central reason why Russia – a waning world power desperate to cling on to its historic zone of influence – has felt able to bully Ukraine in such a shocking way. …The big difference is that Poland has pursued free-market policies, reducing the size of its state, introducing a strict rule of law and respect for property rights, privatising in a sensible way, avoiding the kleptocracy and corruption that has plagued regimes in Kiev, and embracing as much as possible Western capitalism.

Allister cites World Bank data to state that “Poland’s GDP per capita is now 3.3 times greater than Ukraine’s.”

I prefer the Angus Maddison data, which doesn’t show quite the same divergence. But if you look at the chart, you still see an amazing change in relative living standards in the two nations.

These numbers are shocking. Even with the Maddison data, Poland quickly passed Ukraine after the collapse of communism and now enjoys more than twice the level of per-capita output (and would probably have about three times as much per-capita GDP if the numbers were updated through 2014).

This doesn’t mean, by the way, that Poland is a pro-market paradise. As Allister explains, it’s not exactly Hong Kong or Singapore.

Poland’s tax system remains far too oppressive, the red tape is too strict and the bureaucracy still too redolent of the bad old days, the labour market is excessively regulated, parts of the population rejects elements of the new order and the country remains relatively poor, which explains why so many of its most ambitious folk have moved to the UK and elsewhere. But Poland has been one of the great success stories of the post-communist era, whereas Ukraine, tragically, has been one of the great failures.

To add some details, Freedom of the World ranks Poland as the 59th-freest economy in the world.

That’s not great, but it’s a lot better than Ukraine, which ranks only 126 out of 152 nations (behind even Russia!).

More important, Poland’s overall score was only 3.90 in 1990 and now it is up to 7.20.

Ukraine, by contrast, has only climbed to 6.16.

As I’ve already stated, their big problem is Putinomics. If they want to catch the West, they need free markets and small government.

P.S. If you examine the five major factors in Freedom of the World, Ukraine does best in the fiscal policy measure (in part because it has a flat tax!), but it has a horrible grade for monetary policy and doesn’t do well in the other areas.

P.P.S. On the issue of ethnic division in the country, Ukraine also would benefit from Swiss-style decentralization.

P.P.P.S. This chart comparing Argentina, Chile, and Venezuela also should be very persuasive to every open-minded person.

P.P.P.P.S. I visited the Maidan Square, which is where the recent revolution took place.

Here’s one of the main buildings that caught fire.

Here are pictures of those killed by (presumably) government snipers.

And here’s yours truly playing tourist.

It’s only an armored personnel carrier, but it got me thinking that maybe I should copy other Americans and get my own tank?

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Ukraine’s Biggest Problem Isn’t Putin, It’s Putinonomics

With Crimea potentially breaking away from Ukraine and the ongoing risk of conflict, it’s time to revisit the topic.

I explained a few weeks ago that decentralization was one way of defusing the crisis.

Now Kevin Hassett of the American Enterprise Institute has a refreshing and important analysis explaining how bad economic policy has hindered Ukraine’s development.

He explains that Ukraine was one of the former Soviet Bloc nations that made the mistake of not copying the more market-oriented nations of Western Europe.

Prior to the breakup [of the Soviet Empire], Eastern Europe was underdeveloped relative to the West, mostly because of the failure created by central planning. When a market economy is unleashed in such a setting, “convergence” of the standard of living to that of the developed world can be quite rapid. …A large academic literature has emerged analyzing the impact of “going west.” The literature documents that those nations that assimilated into the EU saw dramatic economic growth. …The countries, like Ukraine, that failed to take that path have stagnated.

The impact is remarkable. Using EU membership as a proxy for nations that “went west,” Kevin put together a graph showing how the more market-oriented nations have dramatically out-performed the rest.

He notes that per-capita income has climbed far faster in the western-oriented nations.

Income per capita has grown sharply since the mid 1990s, more than doubling for the former Soviet countries, and increasing about 50 percent for the Eastern Bloc countries (such as the Czech Republic) that have joined the EU. …The three lines on the bottom of the chart depict what has happened to those nations that have not joined the EU. Each of these countries has stagnated, seeing a standard of living that has barely budged since the fall of the USSR.

So what’s the moral of the story? Kevin bluntly writes that people who want to affiliate with Putin are traitors because they are condemning their fellow citizens to economic misery.

Vladimir Putin’s desire to maintain a zone of influence has had a dramatically negative effect on the economic well-being of citizens of the affected countries. It is hard to imagine how anyone could look at such data and not conclude that Putin supporters outside Russia are traitors, if not to their nations at the very least to their compatriots’ prospects of economic security and prosperity.

Now I want to build on what Kevin wrote by stating that “going west” is important because it is a proxy for more economic freedom.

Let’s take another look at his chart, but augment it with some numbers from Economic Freedom of the World.

I collected both the absolute ranking and relative economic freedom scores for the former Soviet Bloc nations, and then put together averages for each of the categories in Kevin’s chart. The first number is the average ranking and the second number is the average score. As you can see, the nations that have enjoyed more growth are the ones that have the most economic liberty.

Time for some caveats. Because of data limitations, the EFW Index does not have numbers for nations such as Kosovo. Moreover, Kevin didn’t include the former Soviet states that are in Asia, and I confess I don’t know for sure whether that means nations such as Armenia and Georgia are excluded.

But those issues only influence the green and red lines, and adding or subtracting those nations doesn’t change the look of the graph.

That having been said, the real moral of the story is that Ukraine needs economic liberty. It doesn’t have that now, and it almost surely won’t have that if it falls more under Putin’s influence.

Why? Because Ukraine already has been practicing Putinonomics (which is a sordid mix of cronyism, regulation, corruption, and weak rule of law), so more Russian control presumably will mean jumping from one frying pan to another.

Simply stated, if you want more prosperity, there’s no substitute for free markets and small government. The more nations move in that direction, the richer they will become.

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Ukraine, Ethnic Division, Decentralization, and Secession

Ukraine is in the news and that’s not a good thing.

I’m not a foreign policy expert, to be sure, but it can’t be a positive sign when nations with nuclear weapons start squabbling with each other. And that’s what’s happening now that Russia is supposedly occupying Crimea and perhaps other parts of Ukraine and Western powers are complaining.

I’m going to add my two cents to this issue, but I’m going to approach it from an unusual angle.

Look at this linguistic map of Ukraine. The red parts of the country show where Russian is the primary language and most people presumably are ethnically Russian.

Now look at these maps (from here, here, here, and here) showing various election results in the country.

Like I said, I’m not overly literate on foreign policy, but isn’t it obvious that the Ukrainians and the Russians have fundamentally different preferences?

No wonder there’s conflict.

But is there a solution? And one that doesn’t involve Putin annexing – either de facto or de jure – the southern and eastern portions of the nation?

It seems there are two options.

1. Secession – The first possibility is to let the two parts of Ukraine have an amicable (or at least non-violent) divorce. That’s what happened to the former Soviet Union. It’s what happened with Czechoslovakia became Slovakia and the Czech Republic. And it’s what happened (albeit with lots of violence) when Yugoslavia broke up.

For what it’s worth, I’ve already suggested that Belgium should split into two nations because of linguistic and cultural differences. So why not the same in Ukraine?

Heck, Walter Williams has argued that the same thing should happen in America, with the pro-liberty parts of the nation seceding from the statist regions.

2. Decentralization – The second possibility is for Ukraine to copy the Swiss model of radical decentralization. In Switzerland, even though there are French cantons, German cantons, and an Italian canton, the various regions of the country don’t squabble with each other because the central government is relatively powerless.

This approach obviously is more attractive than secession for folks who think that existing national borders should be sacrosanct.

And since this post is motivated by the turmoil in Ukraine, it’s worth pointing out that this also seems to be a logical way of defusing tensions across regions.

I confess I have a policy reason for supporting weaker national governments. Simply stated, there’s very strong evidence that decentralization means more tax competition, and when governments are forced to compete for jobs and investment, the economy is less likely to be burdened with high tax rates and excessive redistribution.

Indeed, we also have very strong evidence that the western world became prosperous precisely because the proliferation of small nations and principalities restrained the natural tendencies of governments to oppress and restrain economic activity.

And since Ukraine (notwithstanding it’s flat tax) has a very statist economic system – ranking only 126th in the Economic Freedom of the World index, maybe a bit of internal competition would trigger some much-needed liberalization.

P.S. If you’re intrigued by the secession idea promoted by Walter Williams, you’ll definitely enjoy this bit of humor about a national divorce in the United States.

P.P.S. If you think decentralization and federalism is a better option than secession, the good news is that more and more Americans have unfavorable views of Washington.

P.P.P.S. The tiny nation of Liechtenstein is comprised of seven villages and they have an explicit right to secede if they become unhappy with the central government in Vaduz. And even the statist political crowd in the United Kingdom is considering a bit of federalism.

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