Summers: How to help Ukraine
Recent events in Ukraine have underscored the need for effective external support for economic and political reform. The international community is finally responding with concrete indications of support.
On one level, the situation in Ukraine is unique a product of the country's strategically sensitive location between Russia and Europe. On a broader level, 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 of the transition that occurred after the Berlin Wall fell, or after the Arab uprisings began, or in more isolated cases such as East Timor or Rwanda.
As a general rule, outsiders acted with the best intentions in offering support. But results have often fallen far short of their aspirations. Over the past quarter-century, I have seen close to a dozen cases 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 programs.
First, immediate impact is essential. New governments will not last unless they deliver results that are felt on the ground. Any conditions placed on assistance, intended to ensure progress toward reform, need to recognize political and economic realities. Assistance must be delivered promptly and in a way in which its impact is immediately visible.
For example, social safety nets need to be strengthened before subsidies on items such as food and fuel are removed not afterward, as has too often been the case in the past. The international community needs to understand that, even when the conditions it imposes are economically rational, they may be more than the political process can bear. It is no use blaming the country being assisted when this results in the adoption of bad policies. This is 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 realize that not all assistance can materialize quickly or meet urgent local needs. Recall 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-income ratio is low compared with the crisis countries of the European periphery. Honoring these obligations may be worthwhile, given the benefits of financial stability. That said, Ukraine's private creditors have for some years received risk premiums of 500 basis points or more. This suggests that careful consideration should be given to rescheduling or restructuring the country's debts.
Debt relief can provide a strong signal of political support - as happened 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. Policymakers 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 would prevent such activity. The benefits would be political as well as economic.
Fifth, countries need to pursue broad polices in a way that benefits Ukraine. So, for example, Congress needs to demonstrate that the United States is as committed as the rest of the world to providing full funding for the International Monetary Fund. The United States 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 also goes for Europe which is far closer to Ukraine and has an even greater stake in its future prosperity. The most natural north star for Ukrainian reformers is the possibility of a closer partnership with the European Union.
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.
Lawrence Summers is a professor and past president at Harvard. He was Treasury secretary from 1999 to 2001 and economic adviser to President Barack Obama from 2009 through 2010.