COMMENT: Ukraine and economic reform – talk is cheap

COMMENT: Ukraine and economic reform – talk is cheap
Aivaras Abromavicius, the Lithuanian-born former investment professional who ran Ukraine's economy ministry until he resigned.
By Mark Adomanis in Philadelphia February 10, 2016

Ukraine’s ambitious plans for economic reform faced an unexpected and serious hurdle with the sudden and unexpected resignation of Aivaras Abromavicius, the Lithuanian-born former investment professional running the country’s economy ministry, on February 3.

Before his resignation, Abromavicius was one of a trio of high-profile foreigners, including Minister of Finance Natalie Jaresko and the governor of Odesa Oblast, Mikheil Saakashvili, who had come to symbolize Ukraine’s efforts to make a clean break with its corrupt, oligarchic past. He was broadly popular with the Western business press, receiving positive, if not adulatory, coverage from outlets like Bloomberg and The Economist.

Underlining the extent to which Abromavicius was a Western favourite, the ambassadors of Canada, France, Germany, Italy, Japan, Lithuania, Sweden, Switzerland, the US and UK signed a joint letter expressing their “deep disappointment” and praising the outgoing minister and his “professional team” for implementing “tough but necessary reforms”, and calling on President Petro Poroshenko and the rest of the Ukrainian government to set aside their “parochial differences” and “press forward”.

In the often understated and opaque language of international diplomacy this was essentially the equivalent of an all-caps email – a remarkably brusque set of demands from the West that, at least rhetorically, is supposed to be “a close partner” of Kyiv. It’s evidence that Abromavicius’ resignation did not, to put it mildly, go over terribly well.

And Abromavicius did not go quietly. At a press conference that seemed almost deliberately calculated to burn as many bridges as possible, he said that both he and his team have “no desire to be a front for blatant corruption” and that various government insiders weren’t just passively obstinate, but were “actively seeking to paralyze our work in the government.” That’s pretty strong stuff – as harsh a condemnation of Poroshenko’s government as any of its current or former members has ever offered in public.

While it’s clear he is departing under a cloud, determining exactly what Abromavicius did or didn’t accomplish is a much more contentious topic. The US State Department, among others, has been effusive in its praise for Abromavicius and Ukraine’s overall reform effort. Barely a day goes by without someone noting the “progress” that has been made since the Euromaidan protests toppled the kleptocratic government of Viktor Yanukovych. The State Department even has a Twitter account specifically devoted to sharing good news about Ukraine.

Amid all of the spin and propaganda (Russian state-run media outlets are as effusive in their condemnations of Ukraine as state-run Western outlets are in their praise), what’s a lot less clear is how much reform has actually taken place. Judging by the rankings from places as diverse as the World Bank, World Economic Forum, Transparency International and Heritage Foundation, the answer is: hardly any.

Low scores on the doors

Given the divisiveness of Ukraine it is worth noting that, in political terms, these organizations cover an awful lot of ground. The first two are centrist and technocratic, the third do-goody leftwing, and the last resolutely and unapologetically conservative. If they are somehow in cahoots to understate Ukraine’s progress, the conspiracy to do so is impressively broad-based.

First the World Bank and its “Doing Business” survey, which tries to measure the intrusiveness and quality of government regulation. The score is derived from a “distance to frontier” in which 100 represents a notionally “perfect” level of government regulation. For comparison’s sake, developed European countries tend to cluster in the low to mid-80s.  

This is often presented as a rank-ordered list (ie. “Russia came in 51st place”), but it’s more instructive to look at the actual scores (sometimes the differences between different ranks are so small as to be negligible). In this case both Russia and Ukraine have made modest progress over the past several years, with their scores improving by about 10 points each. However, as the chart hopefully makes clear, the pace of reform has been virtually identical: Russia’s lead over Ukraine was about 9 points in 2013 and by 2016 it had shrunk all the way to… 8 points.

The World Economic Forum’s “competitiveness” index is supposed to be even more comprehensive, essentially looking at all facets of a country’s position within the global economy. Here the story is even less positive for Ukraine: the data show that the gap with Russia has actually grown since 2013, from about 0.05 point to about 0.4 point. Neither country comes out looking particularly good in the WEF’s measurement, their performance is noticeably worse than in the World Bank’s index, but Russia is at least heading in the right direction: according to the data, Ukraine’s competitive position has actually deteriorated since the overthrow of Yanukovych. 

Transparency International’s “Corruption Perceptions Index” tells a broadly similar story: there’s been a little bit of improvement in Ukraine over the past few years, but the pace of positive change is essentially the same as in Russia (the error bars in the graph denote the upper and lower confidence intervals, the “true” level of corruption is somewhere in between). 

Now perhaps one of the indices got it wrong. Accurate and statistically rigorous analysis of an entity as large, varied and complex as an entire country can be really difficult. Some kind of error (perhaps even an error of a magnitude that would render the apparent conclusions invalid) cannot be entirely ruled out. It is possible that Ukraine’s business environment is rapidly improving, but the World Economic Forum’s or the World Bank’s methodologies didn’t pick up this improvement. But for all of the indices to be wrong simultaneously? That’s just not a credible argument. If there were a genuine improvement in regulatory conditions, someone would have noticed it by now.

Perhaps this will change in the future. But if you look at the comparative indices so far, Ukraine’s experience with “reform” has been full of sound and fury, signifying nothing.

Follow @MarkAdomanis – Wharton MBA by day, Russia analyst by night.