An Action Plan for a New Technocratic Government

February 28, 2013 

As Ukraine is undergoing historical political and economic changes, it is important to understand the current trends in order to predict future developments. For that reason, we are pleased to share with you a recent article written by Dr. Savchenko, entitled “An Action Plan for a New Technocratic Government”, which explains the unique role of the new government and next steps it should take, including conducting unpopular economic reforms and signing the EU Association Agreement.


An Action Plan for a New Technocratic Government 

The ex-Deputy Minister of Finance believes that the main tasks of the new government are the conducting of unpopular basic social and economic reforms and the signing of an agreement with the EU. 

Immediately after the beginning of the “Eurorevolution” I proposed a strategy with the most advantageous result – the signing of an EU Association Agreement -- via two very important and new events for Ukraine. First, the formation of a technocratic government (i.e., a government of professional managers). This approach is professional in nature rather than political in that the prime minister or ministers must be highly qualified specialists and effective managers. The task of such a government is to conduct unpopular basic social and economic reforms and to sign an association agreement with the EU. 

As paradoxical as may sound, having a technocratic government is advantageous for the people, the opposition and the government because such a government will take upon itself all responsibility for the state of the economy. And the politicians will handle the elections. A vital factor in the success of a government of specialists is its new quality, characterized by high-level professionalism, idealism, a spotless reputation in both Ukraine and around the world, and disassociation with corruption. 

A government of professionals, by definition and in essence, should be a government for the people. As always, however, there is always a “but”. The people have short-term interests – immediate high salaries and pensions and lower prices, etc. They have long-term interests as well – confidence in tomorrow, a stable growth of welfare, a good education, and safety and fairness in mutual relations between both the government and themselves. A government of professionals must implement economic and administrative mechanisms to reach the long-term goals and interests of the people. Therefore, the people don’t like this type of government at first, but they tolerate it, and later – as a rule within 4-5 years – they begin to understand and value such government’s actions. 

I believe that it is very difficult to conduct reforms in Ukraine. Firstly because Ukrainians don’t love their government (please don’t confuse this with their country) for over 300 or, possibly, 1,300 years regardless of how it was named. And, the last 22 years are no exclusion. The second reason is that the reformers (the “elite”) and the reformed (the people and businesses), frankly speaking, remain far behind those in civilized countries in terms of cultural development and are often poorly educated. 

Nevertheless, if approached correctly, I am positive that reforms will bring about positive results.

Firstly, what are economic reforms? They are transformations in economic and commercial activity based on economic theory which lead to positive, pre-calculated economic and social results over a maximally short timeframe – from several months to one year. When Mr. Balcerowicz initiated reforms (so-called “shock therapy”) in Poland, my colleagues – economists from the US, Russia and other countries – and I were 100% certain that they would be successfully conducted with economic growth and a realistic increase of income for individuals. Why were we so certain? It is simple: the reforms were based on the economic theory, knowledge, facts and experiences of other countries, and not on spontaneous, populist decisions to which we are accustomed in Ukraine. 

It is important to stress social justice as a factor of economic reforms. Economic reforms must actually move toward a societal climate where social justice prevails. Ukrainians very strongly feel social hypocrisy when in place of social justice “reformers” “peddle” pre-election social populism to the people. For example, pension reforms in Ukraine, provided that they are correctly undertaken, should lead to a fair disparity of pensions – to a significant increase of mid-size pension payments and a limitation of maximum (corruption) pension payments; to an appearance of incentives for a long and intensive work life and a legal receipt of income; to the creation of financial resources for long-term investments into the Ukrainian economy. 

If we move directly to reforms, then I build on the fundamental idea that the economic world consists of two types of markets. The first type is the markets of goods which can be perfect and, in general, do not require state regulation in the absence of monopolies. The second type is the financial assets markets (deposits, credit, securities, etc.) which in essence are not perfect (they either rise or fall) and require strict state regulation. The struggle against monopolism and the creation of a transparent, competitive environment will be the main functions of the government on the goods and services markets. 

It is important to understand that it is not the government but the national banks that play the primary role in accelerating the tempo of economic growth. Therefore, the principal goal of the National Bank of Ukraine should become the support of economic growth in Ukraine while maintaining price and financial stability. The National Bank of Ukraine, together with the Ukrainian government, must ensure an annual growth of lending on a level of more than 15% with adequate rates (inflation plus 4-6%) for business and the people. The National Bank of Ukraine must take upon itself the responsibility to keep a low pace of inflation in the country (less than 5%) and stabilize the financial markets. 

We need an inflation targeting policy which is upheld by all countries in the EU and which also includes a floating exchange rate. In the first stage (within two-three years) the “floating” must be manageable and later – free. When one speaks of a floating exchange rate, then it does not exclude any currency interventions of the central bank; however, such interventions must not be periodical and explainable. In other words, they should resolve specific, one-time, situational problems. 

The principal trend of a new budget policy must become a radical decrease of the share of the Gross Domestic Product that is redistributed through the state budget, including at the expense of a reduction of no less than three times the amount of state bureaucrats on all levels, beginning with the central apparatus. The maximum salary of state officials and staff of state enterprises (with a state share in the authorized capital of more than 25%) should not exceed the minimum salary by ten times (now by 100 times). Benefits for state bureaucrats and deputies on all levels should be cancelled. Their property (including all state dachas, hospitals, spa resorts, cars, etc.) should be put up for sale on open auctions. 

The second trend of the state budget policy will be the redistribution of income in favor of the young generation and those who create national wealth. Therefore, I propose to decrease the social tax from 36% to 15%. On income up to ten minimum monthly salaries the social tax should be transferred to the state (unified) social funds, and on income of over ten minimum monthly salaries the social tax should be transferred to individual pension savings accounts. It is important to significantly decrease the amount of young pensioners. In Ukraine today one worker ensures pension for one pensioner. In Europe 2.5 – 3 workers ensure pension for one pensioner. 

I propose decreasing the social and tax pressure on workers and significantly increasing pensions by the following actions: 

  • Liquidation of all special pension systems;
  • Increasing the life expectancy of men to 80 years of age and women to 85 years of age, and under such conditions the pension age will be 65 for all;
  • The maximum pension paid at the expense of the state pension fund should not exceed the minimum pension amount by more than ten times. The pension amount at the expense of private pension funds and individual savings accounts would not be subject to restrictions.

I am more than in agreement with Professor William Nordhaus, who declared that there are no reasons to shift the burden of financing the additional leisure activities of people arising out of their increased life expectancy onto other generations. Importantly, the increase of life expectancy, coupled with the policy of the consequential increase of the pension age, ensure an improvement of the status of all participants in the economy. 

Another important budget trend will be the redistribution of income in favor of local budgets from the current 43% to 60% in five years. In this connection, local self-governance and territorial organizations of the government must base themselves on the principle of subsidiary powers and, in other words, the delegation of authorities. The individual and family will delegate the performance of certain functions to the territorial community, the territorial community will delegate certain functions to the district community, and the regional community will delegate certain functions to the regional community. The amount of territorial communities and regions will be reduced to an optimal level. Clearly defined taxes should be affixed to each level of self-governance. 

Last, but not least, in developing a viable economic policy, a technocratic government must pay attention to the structural peculiarities of the economy. This follows the general principle that governments must stimulate the emergence and development of economic branches in which their countries have concealed competitive advantages and must ensure sufficient reserves of production factors for the successful functioning of companies. 

I will not list all of the global reforms which a technocratic government must undertake to pull the economy out of a crisis; I will only mention the cancellation of 90% of the grants to businesses and corruption schemes in the amount of approximately 100 billion hryvnias! All of these reforms must lead to the situation where in two years’ time the life of Ukrainian society will be based on the following principles: 

  • The annual income of Ukrainians will increase by approximately 10% on the basis of the corresponding increase of the Gross Domestic Product.
  • The life expectancy of Ukrainians will increase to the level of leading European countries – 80-82 years of age.
  • There will be a fair but minimal redistribution of income, including between the generations of Ukrainian citizens. This means a radical decrease of tax pressure, a decrease of the role of the government in the economy, and a significant reduction of the amount of social and state parasites.
  • The cash and property savings of the people will not be taxed, stolen (via the bankruptcy of banks and raiding) or lose value due to inflation and devaluation.

Today, this may sound like a fantasy for us. However, a majority of European countries, including in Eastern Europe, have successfully implemented such reforms. So can Ukraine.







Frishberg & Partners 2012