World Bank consultant speaks on post-Soviet finance (05/16/99)

World Bank consultant speaks on post-Soviet finance

by Janet Hunkel

CAMBRIDGE, Mass. - Speaking at the Ukrainian Research Institute at Harvard University's Seminar in Ukrainian Studies on April 19, Lucan Way, a consultant to The World Bank spoke about intergovernmental finance and how state action in post-Soviet Ukraine affects distribution of state aid.

Popular views about state power are that either it is a direct outgrowth of economic power - the so-called "oligarchs" - or of political connections and networks - the informal clans of closely knit political leaders. Mr. Way, however, stated that "in certain key areas, institutional rules and norms - rather than access to political and economic resources - define state action in Ukraine. The post-Soviet Ukrainian state is able to carry out important activities in ways that contradict the interests of otherwise powerful political and economic groups."

The Soviet method of distributing money among the localities still has an equalizing effect. Mr. Way stated that "the system of intergovernmental finance overwhelmingly benefits a poorer and politically unconnected west at the expense of a richer and politically powerful east" in Ukraine. The effect is an equalizing of local government's budgets, which, in turn, has a beneficial social impact on citizens. Local governments spend $4.5 billion (14-17 percent of the GNP) and that money constitutes 70 percent of public education, 90 percent of health and the bulk of other social protection programs.

Equality issues aside, reforms are needed. The system is not transparent. The need for transparency and a reduction in bureaucracy echo what other economists and analysts have said at HURI's seminar series this semester.

Moreover, the administration has not reformed from the centrally planned practices of supporting industrial growth and material output. Mr. Way quoted a Finance Ministry official - "We are the Ministry of Finance, our job is to finance things, not to cut them" - to illustrate the distance remaining to practice cost-based analysis and efficiency, let alone budgeting for actual expenditure commitments.

Reforms are not being realized, in part because some crucial social interests remain entrenched and institutionalized. Key elements among these are wages, which have doubled over the past four years, and unions, which must agree to any firings and are active participants in the budget process. Mr. Way explained how Ukraine demonstrates the capacity to implement policies despite the existing political and economic situation.

He concluded, "the paradox facing Ukraine is that the sources of Ukraine's limited capacity to provide public goods is also the source of resistance to fundamental public sector restructuring. The key task is to try and preserve institutional capacity while also increasing efficiency."

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