Is Ukraine More Like Latvia or Greece?
This question might seem odd, but it's at the heart of what world leaders need to grapple with at the G7 summit this week.
As the leaders of the G7 meet in Brussels to discuss what to do to help Ukraine, the big foreign policy question they face is: "How many Ukrainians consider themselves Russians?"
But in economic policy, the real question is: "Will the Ukrainians prove to be Latvians or Greeks?" The answer to the latter question — a test of Ukrainians’ willingness to engage in meaningful structural economic reform (especially if it involves economic belt-tightening) may determine whether Western aid to that beleaguered nation facilitates a much-needed economic revival.
If the Ukrainians turn out to be Greeks, resisting reform because austerity measures are ill-conceived and the people feel they have suffered enough, then Ukraine’s ultimate recovery may be delayed, pushing Kiev into Moscow’s waiting arms — once again with offers of assistance, no strings attached. If Ukrainians are at heart Latvians, rejecting Russia’s embrace to endure a deep economic downturn in the short run to facilitate long-term economic integration with the West, then the G7’s plans for Ukraine may bear fruit.
A new Pew Research Center survey suggests that Ukrainians may be more Greek than Latvian, however: less than half voice a willingness to cut government spending and social benefits in return for Western financial assistance.
That’s depressing news, but a bit of history is in order.
In the wake of the global financial crisis, in 2009, Latvia’s economy contracted by 17.7 percent, according to a study by Anders Aslund of the Peterson Institute for International Economics. In response, the government in Riga implemented a comprehensive reform program: spending cuts; a reduction in real unit labor costs; curbing the government budget deficit; while making it easier to register property, resolve insolvency, pay taxes, start a business, and enforce a contract. The results have been striking: 4.1 percent economic growth in 2013 and 3.8 percent expected in 2014.
Greece, on the other hand, has struggled. The economy has shrunk by 26 percent since 2008. And the International Monetary Fund (IMF) expects a meager 0.6 percent expansion in 2014. As Aslund points out, the Greek reform program has been neither radical nor frontloaded. Tax increases have predominated over expenditure cuts and those revenues have proven hard to collect. And while real unit labor costs fell 20.5 percent in Latvia between 2008 and 2013, in Greece they declined by only 10.1 percent, according to Eurostat, suggesting that Greek wages are still too high to spark new investment and a renewal of growth.
The Ukrainian economic outlook is bleak. The economy is expected to contract by 5 percent this year as the nation faces an overvalued exchange rate, a substantial budget deficit, and big losses in the energy sector that have put Ukraine on a "highly unsustainable course," according to a recent International Monetary Fund report. This report, one should note, came before the recent violence and includes Crimea, so expect an even more negative outlook.
To help Ukraine reverse economic course, the IMF has already approved a $17 billion emergency rescue package that unlocks an additional $15 billion in international financing, including loans and other funding from the United States, Europe, and the World Bank.
In return, the government in Kiev has agreed to substantially increase both retail gas and heating prices. It will cancel pension and public sector wage increases planned for this year and freeze public sector hiring. It plans to abandon a cut in the sales tax, hike duties on diesel fuel, and impose new sales taxes on pharmaceutical and medical products.
But such reforms have a history of foundering in Ukraine. In the past six years, two previous IMF-supported economic restructuring efforts have gone off track.
The success of any G7 initiative to help Ukraine hinges on what the Ukrainian people are able and willing to do for themselves. But support for economic reform is not widely embraced by the Ukrainian public. Just 45 percent say the country should accept economic aid from Western nations if their government must agree to reduce spending and social benefits in return, according to the Pew Research Center survey. Fully 28 percent reject such help if it is dependent on cuts in Ukrainian government outlays. Another 27 percent voice the view that neither option is acceptable, or that they want both, or that they have no opinion. (The Ukrainian results do not include data from Crimea.)
Support for belt-tightening in return for aid is particularly low among Ukrainians age 50 and older. Just 41 percent are willing to accept any such bargain. But more than half (53 percent) of younger Ukrainians support a tradeoff.
The complex politics of economic reform within Ukraine are evident in the regional and ethnic discrepancies in public willingness to suffer additional short-term economic pain in the hope of long-term gain. Six-in-ten Ukrainians living in the western and central parts of the country support cutbacks in public spending and benefits in return for Western financial assistance. But just 33 percent of Ukrainians in the embattled eastern oblasts favor such a bargain. Moreover, 43 percent of Ukrainians living in the East who only speak Russian oppose subsidy losses to obtain international aid, while only 26 percent accept any quid-pro-quo.
So while the geopolitics of Ukrainian aid may dominate G7 discussions in Brussels, it may be the regional and ethnic politics of additional austerity that determine whether such assistance ultimately proves successful. And that’s at the heart of whether the Ukrainians turn out more like the Latvians or the Greeks.