March 9, 2014 5:35 pm

‘Potemkin money’ is the wrong way to help Ukraine

The west should make modest promises and then strive to deliver more than the country expects
©Reuters

Events in Ukraine have underscored the importance of effective external support for successful economic and political reform. The international community is finally responding with concrete indications of support.

At one level the situation in Ukraine is unique – a product of the country’s sensitive location between Russia and Europe. At another, however, it is merely the latest example of a phenomenon that recurs all too often. A government that is illegitimate or at least highly problematic is brought down. The world community seeks to support economic reform. A new government, purportedly more democratic and legitimate, is installed in its place. Think, for example, of the transition that occurred after the Berlin Wall fell; or after the Arab uprisings; or in more isolated cases such as East Timor or Rwanda.

As a general rule, outsiders acted with the best of intentions in offering their support. But the results have often fallen short of their aspirations. I have seen close to a dozen cases over the past quarter-century where the precedent of the Marshall Plan was invoked. None was as successful as the original. This reflects the truth that functioning institutions cannot be imposed from the outside. Countries and their peoples shape their own destinies. Still, there are important lessons for the design of support programmes.

First, immediate impact is essential. New governments will not last unless they deliver results that are felt on the ground. Outside support can be made conditional on progress towards reform but the conditions need to reflect political reality. Assistance must be delivered promptly so that its impact quickly becomes visible.

For example, social safety nets need to be strengthened before subsidies on items such as food and fuel are removed – not afterwards, as has too often been the case in the past. The international community needs to understand that, even when the conditions they impose are economically rational, they may be more than the political process can bear. It is no use for international agencies to blame the country they are trying to assist when this results in the adoption of bad policies. Such moments are surely a time for political concerns to trump technocrats’ fears.

Second, avoid “Potemkin money” – the tendency to announce huge assistance packages that grab the headlines but belie the inevitable truth that much of the cash will take time to arrive. The result is disappointment followed by disillusionment as recipients realise that not all assistance can materialise quickly or meet urgent local needs. It bears emphasis that the original Marshall Plan was announced without any figures or fact sheets. In Ukraine the west should make modest promises – and then strive to deliver more than the country has been led to expect.

Third, be realistic about debts. Ukraine’s debt-to-income ratio is low compared with those of the crisis countries of the European periphery. Honouring these obligations may be worthwhile, given the benefits of financial stability.

However, Ukraine’s private creditors have for some years received risk premiums of 500 basis points or more. Careful consideration should be given to rescheduling or restructuring the country’s debts.

Debt relief can provide a strong signal of political support – as it did in Poland in 1989. Countries in crisis should be wary of taking on debt to finance projects that will not generate the cash flows necessary to repay it. In such cases, donors should offer support in the form of grants rather than loans.

Fourth, honest management is as important as prudent policy. Policy makers have traditionally focused on the latter. But that is a mistake. Theft of public resources is a major source of poor economic performance.

The international community should do everything it can to recover ill-gotten gains from former Ukrainian officials and to put in place procedures that will prevent future skulduggery. The benefits would be political, as well as economic.

Fifth, countries need to pursue broad policies in a way that benefits Ukraine. For example, Congress needs to demonstrate that the US is as committed as the rest of the world to providing full funding for the International Monetary Fund. America should also move to allow crude oil and natural gas exports to flow more freely. Over time, this would contribute to Ukraine’s autonomy and economic strength. All of this goes for Europe, too – which is far closer to Ukraine and has an even greater stake in the country’s future prosperity. The possibility of a closer partnership with the EU is a North Star that can guide Ukrainian reformists.

Respect for these principles does not ensure success. But ignoring them almost guarantees failure. Given what is at stake with Russia in Crimea, that gloomy outcome must be strenuously avoided.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

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Letters in response to this column:

What allows Putin to act with impunity / From Mr Stephen Eccles

Marshall plan may not be for Ukriane / From Dr Hugh Goodacre

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