The Washington Consensus and Ukraine's 'Transition' Economy

by Jeffrey Sommers

Originally published on Z-Net as their sustainer daily article

I am in Kiev as the pampered guest of a Baltic offshore company which helps CIS nations avoid  taxation by incorporating in the Channel Islands, Cyprus,the Cayman Islands, or even the US's own outlaw banking state of Delaware. Granted, many of the CIS nation's tax laws are so onerous that business would be impossible if all were followed, but I also doubt whether better laws would result in dramatically reduced offshore activity.

In addition to the legions of pensioners and single women with children seeking spare kopecks for bread, there are also young women in their prime openly selling themselves to the highest bidder. Our local host in Kiev went on a disciplined workout and 'beauty' regimen until she bagged a local hustler that made off with one of the state's pharmaceutical factories. As his kept woman (I assume he has a spouse also) she enjoys the prestige and pleasures of weekend junkets to Milan for opera and taking in Europe's best resorts.

As the supply of robber barons is in limited, other women must find alternative patrons. Next to our table is a mid-50ish American interviewing potential spouses. The interviewee appears to be in her early 20s. Our unexceptional American, with all the characteristics of someone his age, is trying to find common ground with the woman who might prove his new wife.

After all attempts fail, he pulls out the failsafe option of Bruce Willis films. She only vaguely knows who he is, but his frustration boils over to near anger that she can not discuss this actor's films with the same passion they arise in him. The discussion finally turns to business, as he informs her that America is full of pitfalls, and if she hopes to have any success she needs a guide: him.

More spice for this evening's dinner is provided by a delegation from the People's Republic of China, including uniformed officers, which one might hazard a guess are there to draw upon the remnants of Ukraine's military industrial complex.

How has Ukraine come to this?

By the early 1990s it was already apparent that the Sachs/Summers Washington Consensus model had indeed transformed the CIS nations making up the former Soviet Union. Indeed, Jeffrey Sachs imposed himself on Ukraine after helping ruin Russia. The Ukrainians said no thanks, but Sachs, ever the persistent suitor, would not take no for an answer and lobbied his US government contacts to make Ukraine embrace him on condition of aid. Our 'experts' called them 'transition economies.' Yet, it was a transition to poverty rather than prosperity. The idea was that a short period of pain would be followed by rapid growth and prosperity for all. The West's most prominent establishment intellectuals pitched neoliberal shock treatment nostrums with simple slogans such as 'you can't jump a chasm in two steps.' This was the intellectual equivalent of flubber. Quite true, one can not jump a chasm in two steps. But, neither can you jump a chasm in one. Chasms are traversed by carefully constructed bridges, not cartoon like leaps by the Incredible Hulk. Those who should have known better at the time, should have seen through the flawed metaphors describing the strategy.

As the failures mounted, ever more clever ideological cover was blown to obscure the mounting disaster unfolding in the former USSR. In Ukraine, one of the most developed areas in the Soviet Union, yet also one of the worst hit by the transition, new ways of explaining the failures were manufactured to maintain a modicum of respectability by the bearers of the new ideology for development in post-communist nations. In 1993, US ambassador to the Ukraine, William Green Miller, cleverly remarked that the chaos and creation of a new rich class driven to engage in the crassest consumption was merely like the US Gilded Age with its robber barons. What the ambassador failed to mention was that despite all the horrors of late 19th century industrialization, with its primary accumulation grounded in full scale repression of workers and hyper-exploitation of immigrants, they at least industrialized the US. By contrast, CIS nations, such as Ukraine, were being deindustrialized by the new robber barons.

Industrialization has never been a pleasant affair. It has always ground up at least one generation whose labor was undercompensated in order to pay for its machines, factories, and technology. In the USSR, this period was condensed in time, but retained the full horror of all primary accumulation. Industrialization came at a price too high to contemplate repeating. Yet,it had been achieved, and with it, living standards and quality of life improved dramatically. Just as criminal were Stalin's methods for industrialization, it was reprehensible to throw it away during the post-communism transition. In this sense, Ukraine suffered two great tragedies: industrialization, wrought at such high human costs, and then its planned deindustrialization, with the loss of all the benefits industrialization had brought. The costs are incalculable. The numbers defy understanding as the cascading individual tragedies and personal humiliations can never be fully grasped by one mind.

Future Prospects:

Much of Ukraine's industry lay in ruins. Indeed, one measure of its deindustrialization and poverty has been Ukraine's drastically cut power consumption. Its power grid is only operating at half capacity. Much of what was of value, such as high tech machinery, was spirited away early in the 'transition.' It is unlikely that this equipment can ever be acquired again soon. At the same time, Ukraine continues to compete globally in steel and chemicals. Indeed, Ukraine exposes the lie of free trade and reveals the historically iron law that rich nations protect their own industries, but demand free trade of others. Ukrainian steel is so price competitive that rich nations ban it, especially the US, but some escapes into the world market anyway.

Privatizations continue. Like many nations the past 25 years, Ukraine has fallen into a debt trap. In most CIS nations the deal between them and the West has been to keep their economies open. They are to let out the vast wealth of their raw materials and machinery. In return the IMF will protect the government overseers of this system with enough money to keep their states operating, along with ample opportunities for government officials to skim. The money flowing out of CIS nations far exceeds what the West has sent in loans. The West gains long-term advantage from this system in Ukraine and CIS nations generally. Not only have these states been kept open for capital and resource flight to the West, but the interest payments on IMF and private loans ensure privatizations continue apace. For example, in order to meet these crushing debt service payments, Ukraine is considering selling off half its telephone system, Uktelekom. Ukraine will lose this source of state revenue, its customers will pay much higher phone rates, with considerable profits exported, and in return will only receive a one-time lump sum to pay the interest payments on loans designed to grease the wheels of privatization to begin with. In other words, Ukraine gets nothing.

More shocking yet, is that what is perhaps the world's second most productive black earth farming belt in the world in some years is importing, rather than exporting, grain and flour according to United States Department of Agriculture data. For the last two centuries Ukraine has been the breadbasket for much of the world. Indeed, from the Romanovs through Stalin, Ukraine's exported grain funded Russian industrialization drives managed to feed much of the USSR. Today, it can not even manage to always feed itself. Yet, there are beneficiaries. The US based grain distribution giant, Cargill, is very active in Ukraine, with their man Patrick Bracken, in charge of Ukraine operations and serving as President and Chairman of the American Chamber of Commerce in Ukraine. Indeed, they no doubt benefit handsomely from selling US grain to Ukraine and look forward to controlling grain export if this richest of agricultural areas can again become productive. Either way, importing food, or exporting it, food giants like Cargill win, while Ukraine loses.

Yet, after a decade of decline, there are signs of growth. Yevgeny Primakov was brought in by Boris Yeltsin to apply a tourniquet to Yeltsin's hemorrhaging economy in 1998. He stabilized Russia's economy, and was then quickly discharged before he could threaten the Yelstin oligarchy. That oligarchy bled Russia dry while also serving the West's interest of keeping Russia uncompetitive in the world economy, and as an exporter of raw materials and importer of manufactured goods. With the economy placed on sounder footing under Primakov's tenure, the Russian economy also benefited from other developments. The most obvious was the rise in oil prices, but more significantly, and yet also more ignored, was the impact of the Russian ruble's collapse. This was more than a blow to Russia's elite accustomed to buying Western luxury imports cheap on its overvalued currency; it also placed another chink in neoliberalism's already battered armor. Nations with raw materials and an industrial capacity can benefit from a devaluation of an overvalued currency. If the currency is low, they can both produce for the home market, and be competitive for global export. This is exactly what Yeltsin elites and his Western partners worked to avoid. Russia's new elites and middle-classes preferred the over-valued ruble that made luxury foreign imports cheap, and that brought them good returns on selling off its industrial infrastructure and raw materials. The Yeltsin forces lived well, while the West profited from selling in the Russian and CIS markets. Nobody cared if it was done by killing the nation's economy. The collapsed ruble in 1998, however, brought forth the possibility of resuscitating Russia's industry as Western imports became expensive, thus requiring people to buy local products in a form of import substitution. For the first time since 1991, Russia witnessed investment in production following the 1998 ruble crisis. From dairy products to consumer goods like tires, people were again buying Russian. This has led to Russia again becoming a locomotive for growth pulling along neighboring nations with it. From the Baltic down to the Ukraine, neighboring nations are slowly benefiting from Russia's modest new prosperity. Ukraine is seeing the benefits of Russia's mildly revived industry. Moreover, the US economy, and global economy generally, are providing high demand for Ukrainian products such as its competitive steel. Granted, the US and other advanced nations do all they can to keep this steel out of their markets. This gives lie to the free trade nostrums pushed by the planners of the new global economy. The IMF and World Bank, constitute a new kind of GOSPLAN for the world system, with commissars operating in universities and media to ensure the project is undertaken with the right ideological elan. Yet, investment capital abhors a vacuum and will circumvent rich nation restrictions on trade whenever it can. Thus, some Ukrainian steel and other advanced products are leaking out onto the world market. It is far below its potential, but it is enough to begin generating some growth in the devastated Ukrainian economy.

In sum, Ukraine is finally experiencing some genuine growth this year for the first time since the transition began. It may witness 5% growth after a decade of tumbling. Hardly stellar numbers for a nation that has sunk so low, but it is progress. The reasons for this modest growth have largely arisen from leaks in the dyke of Washington Consensus policies on matters of monetary issues and industrial policy in Russia, and the limited failures of the West to fully enforce its protectionism against the poor nations they helped create. One only hopes developing nations forced to take the neoliberal medicine, and Western intellectuals who traffic in it, take note.

Jeffrey Sommers
World History Center