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Balcerowicz invited to join Ukrainian reform effort

January 31, 2015

In an effort to further fill the Ukrainian reform effort with international stars with relevant experience, President Poroshenko has invited the Polish politician and economist Leszek Balcerowicz, the man who was instrumental in devising the Polish reformation plan of 1989, to join the Ukrainian effort.

The Balcerowicz Plan, also known as “Shock Therapy”, has been referred to numerous time throughout the years at this blog – almost every time previous governments have made hollow calls for Ukrainian reform in fact.  (Search within the archives and you will find, should you feel the need).

One of the most notable and wise features about the Balcerowicz Plan, was that is was presented to the public prior to its introduction on 31st December 1989 – on 6th October 1989, on television, to be precise.  Thus the public was mentally prepared for what was to come, some months in advance – albeit, the plan hit far harder than society was perhaps prepared for.  Nonetheless, the “Shock Therapy” was still far less of a shock to the people, than it was to the Polish economy, when introduced.

The plan consisted of:

Act on Financial Economy Within State-owned Companies, which allowed for state-owned businesses to declare bankruptcy and ended the fiction by which companies were able to exist even if their effectiveness and accountability was close to none.
Act on Banking Law, which forbade financing the state budget deficit by the national central bank and forbade the issue of new currency.
Act on Credits, which abolished the preferential laws on credits for state-owned companies and tied interest rates to inflation.
Act on Taxation of Excessive Wage Rise, introducing the so-called “Popiwek Tax” limiting the wage increase in state-owned companies in order to limit hyperinflation.
Act on New Rules of Taxation, introducing common taxation for all companies and abolishing special taxes that could previously have been applied to private companies through means of administrative decision.
Act on Economic Activity of Foreign Investors, allowing foreign companies and private people to invest in Poland and export their profits abroad.
Act on Foreign Currencies, introducing internal exchangeability of the Złoty and abolishing the state monopoly in international trade.
Act on Customs Law, creating a uniform customs rate for all companies.
Act on Employment, regulating the duties of unemployment agencies.
Act on Special Circumstances Under Which a Worker Could be Laid Off – protecting the workers of state firms from being fired in large numbers and guaranteeing unemployment grants and severance pay.

By 1992 the positive effects of the plan were being felt -although the intervening years were undoubtedly a “populist politician’s” dream when it came to saying just how badly the effects of the plan were being felt during that time.  There is no shortage of populist Ukrainian politicians that would boohoo any such plan for Ukraine.  The Kremlin too, would no doubt exploit it.

As written a few days ago, Ukraine already has numerous reformation plans.  Indeed Ukraine has far more plans, from numerous authors, than could be found at an annual gathering of architects “best design” ceremony.  Thus the vast majority, if not all, of the Balcerowicz Plan will already appear in one, or several, existing plans.

What Ukraine hasn’t done (thus far), that Poland did, is explain the plan(s) to the Ukrainian constituency “adult to adult” – perhaps because it doesn’t know what to do with so many plans, or perhaps nobody wants to accept personal responsibility and accountability for implementing them.

Implementation teams, if they exist, are completely unknown to the public – ergo, personal responsibility and accountability is zero in the eyes of an expectant society when it comes to implementation.  As Ukrainian history ably displays, “the team” is always happy to produce plans, but nobody in “the team” is ever held individually accountable for failure of implementation once any such plan has been announced – and subsequently fails to tangibly manifest.

However, Ukraine is not Poland – and successful reform within Poland still continues to this day.  It is an on-going process.

Indeed Ukraine (and Georgia, Moldova and some Balkan nations) suffer an additional and significant problem that Poland never faced – that of a meaningful, cancerous, overt and covert, insidious Kremlin intervention.  Poland was blessed by a weak (and distant compared to Ukraine and Georgia) Russia when it began to reform.  Upon joining NATO its continuing reforms then enjoyed the protection of significant security.  Poland is now strong enough to cope with the current Kremlin shenanigans within its borders, preventing any reform derailing.

It goes without saying that in the current circumstances, such things matter, for security removes the excuse that war (in whatever form it takes) slows or prevents reform.  War (in whatever form) presents a universal excuse to a weak and/or infiltrated political class for not, or failing at, reform.  It is, at the very least, a distraction with a significant impact upon the national treasury and society alike – perhaps with catastrophic consequences to the orientation of the victim nation’s direction.

Thus whilst the Kremlin experiments with a hybrid and asymmetric war, the west experiments with economic warfare – Ukraine (Moldova, Georgia and some Balkan nations), experiment with reform without security whilst under Kremlin attack.

The Kremlin will ultimately fail to bring down the post 1945 European/western architecture – though it may cause considerable damage along the way if Europe/”The West” does not fully appreciate the challenge that has been presented.

Given enough time, the western economic warfare at current levels may ultimately prove to be successful.  Turning up the “pain dial” is always an option.

What is entirely unclear, and perhaps the least likely experiment to succeed, is national reformation without any form of “group security”, whilst under consistent and meaningful Kremlin attack – perhaps aggravated by the absence of clearly defined external western prizes for success.

Undoubtedly Mr Balcerowicz would bring something to the Ukrainian table should he accept the offer made to him – but when all is said and done, Ukraine is not Poland.

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