Balcerowicz says privatisation is key to Ukraine reforms

Balcerowicz says privatisation is key to Ukraine reforms
Former Polish finance minister Leszek Balcerowicz says a lot of change is already happening in Ukraine.
By Ben Aris in London May 12, 2016

Former Polish Finance Minister Leszek Balcerowicz, who has recently been appointed chief adviser to Ukrainian President Petro Poroshenko, argues privatisation is the fundamental reform that must be done if the country is to be transformed. He also remains positive about the progress Ukraine has already made.

“There is a lot of change already happening,” Balcerowicz told bne IntelliNews on the sidelines of the EBRD Annual meeting. “The power of some oligarchs is already very much reduced and one should also remember the difficult economic situation in Ukraine is due to the legacy of the past plus Russian aggression – including the ban on exports. Any country that suffered a ban on exports to their main economic partner will end of up in deep recession.”

Balcerowicz oversaw Poland’s highly successful privatisation drive and has been asked by Poroshenko to advise the government as Ukraine attempts the same reform. But he warns that privatisation can’t be rushed.

“Attack first and be fast with the liberal reforms. The blunder many countries have done is they go too slow. But you can deregulate in a couple of months, but you can’t privatise in a few months. It takes years,” Balcerowicz told a panel discussion at the EBRD Annual Meeting.

The complexity of privatisation is the main issue that politicians face. Balcerowicz points out that the social safety net in communist times was that workers were never sacked, regardless of their performance, and so politicians are reluctant to remove this security from their electorate as they fear for their jobs.

“There is a myth that if you reform you lose elections. If you don't reform you also lose elections,” quips Balcerowicz. “Its just if you don't do it then your country is worse off at the end of you term in office.”

The joke highlights the extraordinary challenge all transition politicians face, and those in Ukraine especially.

“There is a need to design your policies to give some payback early,” Italian Finance minister Pier Carlo Padoan told the discussion panel. “In general, reforms bear fruit only after 3-5 years and given it takes time to get legislation through parliament that can mean politicians get overtaken by the election cycle. But it is necessary to get the public opinion on your side so you need some early successes.”

Part of this is the language that you use, both men argued in their session, “A tale of two finance minsters: challenges past and present”.

“Shock therapy was a big problem as most people associate shocks with electric shocks and those are not very pleasant,” says Balcerowicz. “The popularist parties are using these images in their campaigns and they become politically loaded terms. You need to build a consensus and persuade civil society of the need for these reforms.”

Poland launched its first round of reforms in 1989 long before the prospect of European Union (EU) integration was on the cards, but EU membership allowed them to finish the process, says Balcerowicz, who was the one who negotiated Poland’s Association Agreement with the EU.

Balcerowicz argues that of all the reforms that are needed privatisation is the most important.

“If you have hyperinflation you need to put it down fast as it is like a fire in the house, but privatisation is the key to ending socialism.”

Balcerowicz points to Margaret Thatcher as the model. “They tried all the reforms and they all failed so Britain privatised. That was the lesson we learnt.”

“There is no country in the world where the state dominates the economy that is also a democracy. If the state is the most powerful player in the economy then it is also the most powerful player in politics. To have true democracy you need to transfer the ownership of these companies to the private sector. It worries me that it has been demonised in some countries. Privatisation is the fundamental reform,” says Balcerowicz. “Unless your model is Belarus or Turkmenistan,” he adds with a wry smile.