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Wednesday, October 5, 2022

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The third attempt at an economic breakthrough

After the victory, a new window of opportunity will open for Ukraine. After our two revolutions, this period will not be very long – approximately six months or a year. It’s time to ask ourselves what we would like to do so importantly during this period, so as not to lose a new chance for change. It is unacceptable for us that after such a bloody war in economic terms, in terms of people’s well-being, everything ends with the traditional “as always”.

Before sketching out a plan for the future, it is worth recalling where we were on our path of reform until February 24, 2022. After the Revolution of Dignity, a really large-scale work was done. Among the fundamental changes are the transition to inflation targeting (floating exchange rate) and cleaning up the banking sector, bringing gas and heating prices closer to market levels, corporate governance reform, public procurement reform, the land market, the anti-corruption vertical, the start of real judicial reform, etc. . I didn’t remember everything, the list can be continued, in eight years we have really overcome a significant path.

What remains to be done in order to still get a real economic breakthrough with the arrival of multibillion-dollar investments? By and large, all recommendations are known, and they are rewritten from year to year in different strategies/memorandums. Therefore, here I want to pay attention not to the recommendations themselves, but to their prioritization since one of the key shortcomings of previous reforms is that the front of work is too wide. With a vast field to work with and a limited desire to make real change, it’s very easy to choose something of little value and still appear actionable and reform-minded.

So, the key and clearly priority reform to achieve a real economic breakthrough should be judicial reform. To be more precise, bringing the begun judicial reform to its logical conclusion, that is, a complete reboot of the High Council of Justice under the supervision of the public and the international community. This has been said thousands of times and it must be repeated: for international capital, the rule of law is a critical condition for long-term investment in the country. Especially after numerous stories of “squeezing out” property under the patronage of those in the power of various calibers. It is possible not to implement many of the recommendations of the IMF and the World Bank (I do not believe that I am writing this), but judicial reform is a critical condition for an economic breakthrough.

If and only if item #1, that is, judicial reform, is met, we can talk about large-scale tax reform – priority #2. The war and, as a result, the fall in budget revenues created a unique opportunity to reset the tax system without creating additional stress for the economy. The government cut taxes for the period of martial law, but the bad news is that after the end of the war, all the burdensomeness of the tax system will return again. We are going to the EU, and in the EU the value-added tax (VAT) is basic. But there is one nuance, which for some reason is not very common to talk about in Ukrainian territories – VAT in the EU countries works in fact in the same way as a sales tax, which is desired by Ukrainian entrepreneurs. There is no tax credit, and no import fees. In the EU countries, VAT is paid only at the stage of the final sale, that is, it is in fact a sales tax, it is simply called differently. Why have we still not switched to just such a pleasant way for businesses to administer VAT? After all, then there will be incomparably less draconian tax audits, no headaches due to VAT refunds, and no fraud with VAT credits. But because VAT on imports and other customs payments processed upon importation, before the war, reached as much as a third (!) of tax revenues of the budget. Who would it be in normal conditions and in a normal state just to let go somewhere around 40 billion hryvnia of budget revenues per month? Catch them later around the country, it is not known where and how they will sell these goods. issued upon import, before the war reached as much as a third (!) of tax revenues of the budget. Who would it be in normal conditions and in a normal state just to let go somewhere around 40 billion hryvnia of budget revenues per month? Catch them later around the country, it is not known where and how they will sell these goods. issued upon import, before the war reached as much as a third (!) of tax revenues of the budget. Who would it be in normal conditions and in a normal state just to let go somewhere around 40 billion hryvnia of budget revenues per month? Catch them later around the country, it is not known where and how they will sell these goods.

But wait, the government has canceled customs payments for the wartime period. The government has already (!) released a third of tax revenues in order to make life easier for people at this difficult time (indeed, because there was no other choice). Maybe this really is a window of opportunity – to switch to the principles of VAT administration according to EU patterns? It is clear that this idea is very uncomfortable for customs officers on the western border – you can’t play with the customs value anymore, everything will depend on the final sale price. In general, this idea is seditious for people sitting on VAT refunds (the amount of compensation in real money will decrease significantly). Yes, and much needs to be harmonized with the basic processes of the European Union (for example, it is necessary to unify the primary financial documents with the practices of the EU countries). But if this is done,

It would also be useful to do something with ERUs and pension reform, but after such global events, after the war, we will need a high-quality population census to start. To clearly know who remained to live in the country after such mass resettlement. As soon as we know how many of us there are, it will be imperative to reform the ERUs and put the pension system on a more sustainable footing.

Priority No. 3 is the strengthening of the Antimonopoly Committee of Ukraine and the Accounts Chamber of Ukraine. Do not be surprised. Ukrainians demand de-oligarchization and destruction of opportunities for so-called rent (super profits) for smaller “predators”. Strange as it may seem, these two inconspicuous institutions – the Antimonopoly and Accounting – are a precision weapon against the oligarchy and rent. Carpet bombing by anti-oligarchic laws only gives a lot of PR with minimal results. The fact is that the creation of rental opportunities (surplus profits) is not even always a crime that falls under criminal liability. It’s just that people saw an opportunity, attracted officials or people’s representatives to this opportunity, and collected an additional hryvnia per month from each Ukrainian. The Ukrainians are not hurt, but the interested parties got several tens of additional millions. Neither the prosecutor’s office, nor the police, nor the anti-corruption vertical will find corpus delicti in this because the law does not prohibit everything. A strong and competent Antimonopoly Committee, accountable to the public, and not too interested players, is the only chance to meticulously monitor and cut out the points of artificial creation of such superprofits in our economy.

And what about the Accounts Chamber? Here we have state-owned enterprises, their managers write beautifully on social networks about their victories. It would be interesting to read the reports of the Accounts Chamber, so to speak, an alternative point of view, about their affairs and their real effectiveness. Strengthening corporate governance is also very important, and the IMF will definitely remember this in its recommendations. But, as we see from the experience of recent years, even people with Western diplomas, nominally declaring a market orientation, diligently join the game called “state protectionism” as soon as they find themselves in the chair of a top manager of a state-owned enterprise. With state-owned enterprises, we could be helped to deal with the strengthened Antimonopoly and Accounting, necessarily in cooperation with civil society.

But the question “what to do?” is not as critical as the question “how exactly to implement this?”. Problem points and reform plans have long been and quite extensively painted (recall the numerous memorandums with the IMF, where the reform plan is repeated from year to year). But who can become the engine of change and how such real changes can be realized is still an open field for discussion.

The fundamental difference between today’s window of opportunity is that after the war, the current government will not change, that is, people who adhered to a certain economic course before the war will use the new “portal to a better future”. The immutability of power in this situation plays both a positive and a negative role. The positive is that it will not be necessary to wait long until all the ranks are seated in their places. The downside is that all the reforms before the start of the war came under the IMF’s lash, fearing a lack of cooperation and funding. And it just so happens that the responsibility for realizing a new chance for a breakthrough will fall on the shoulders of precisely those people who, in the last months before the war, sabotaged the appointment of an independent prosecutor of the Special Anti-Corruption Prosecutor’s Office(in order to make the anti-corruption vertical work) and with great difficulty and only under very strong pressure from the West, they agreed to restart the High Council of Justice under the supervision of independent Western experts (that is, they moved the judicial reform forward).

Another fundamental difference in the post-war window of opportunity is the expected Western support of several hundred billion dollars for the reconstruction of Ukraine. I think the prospect of the “Great Recovery” is very appealing to the ideologists of the “Great Construction”.

This alignment suggests to us that the framework of the post-war movement should be outlined by the formula already known to us “money for restoration in exchange for reforms. ” This format of cooperation gives a high probability that a new window of opportunity will not be lost even in the absence of personnel changes in the country’s leadership. This is the answer to the question “how exactly to implement it?”.

And what about the engines of reform? It is my deep conviction that hope here lies mainly in civil society. The country’s political leadership in its maneuvers is constrained by political ratings and orientation to today’s popularity. An additional beacon for the president’s office is donor funding. Money is critically needed, especially now and then for restoration. But we have already seen many times that Western partners are rather poorly versed in the nuances of maneuvering by the Ukrainian authorities. And in conditions where the West begins to feel guilty for the tragic events in Ukraine, this maneuvering will certainly become more dodgy. In such conditions, in the plane of reforms, it is best to use the “sandwich” strategy, when, on the one hand, the country’s leadership will be squeezed by the need for constant financial support from the West for both current needs and restoration, and on the other hand, civil society, which clearly monitors all the nuances of developments on the ground, will correct the necessary steps to be taken to receive the next portion of funding. In this format, there is every chance to neutralize the “crony connections” at the top even without personnel rotations and to implement critical reforms in the current conditions.

If it is still possible to achieve the unity of civil society on key requirements and priorities, then we will have everything necessary for an economic breakthrough to really become a reality.

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