NEWS AND VIEWS: Aid to Ukraine and why it does not work (04/09/00)

NEWS AND VIEWS

Aid to Ukraine and why it does not work

by Walter Prochorenko

Ukraine has been the recipient of substantial aid from the United States and from Western European countries, but so far none of this aid has made a dent in the Ukrainian economy, which appears to be deteriorating at a progressively faster pace.

The question is "Why?"

Certainly the amount of aid received by Ukraine is proportionally far less than that received by European nations from the Marshall Plan after World War II, even though the situation (at least psychologically) in Russia, Ukraine and other Soviet bloc countries was similar because of the breakdown of the union.

When systems change, most people find themselves lost in new environments. This happened after the abolition of slavery in the United States, and the consequences are still being felt. This is happening now in all industries with the advent of the Internet and new ways of working, buying, playing, socializing and communicating. Change does not always come easily - especially to people who were mostly concerned with making a living and feeding their families.

However, the biggest reason that aid to Ukraine (and to Russia for that matter) has not worked, has to do with how it was, and is, disbursed. This is not a simple issue; it is as complex as the various programs that have been instituted. However, if we look at the basic principles of this aid, we can certainly have a good idea of why the problems exist.

Direct aid: It is a well-known fact, and one of human nature that when one receives something for nothing one appreciates it far less then when one earns that something. The process of giving direct aid is accomplishing exactly the opposite of what it is trying to cure.

In its own way Moscow "funded" all major projects in Ukraine, which included the arts, education, roads, theaters, airports, resorts, plants, etc. Ukrainians came to expect that when money was needed they contacted Moscow, and Moscow sent it to them. Now the same is happening with the West.

When Ukraine runs out of funds it asks Washington, or Bonn, or Brussels, for some funds, and after much hand-wringing, threats, requests for promises, and "investigation" it usually gets them. This succeeds only in buying a few more months of time, but resolves nothing. The funds do not go to "kick-start" the economy or to fund new industries or businesses. It goes to pay some interest debts, build a few more palaces and dachas for the elite and as in the case of Russia, feed a few more Swiss accounts.
Consultants: How does a 28-year-old "financial consultant" from the Interantional Monetary Fund or the World Bank or any other Western institution, tell a hardened, Soviet-educated, bloated bureaucrat how to run a bank, or change some laws, or introduce security measures, or run his plant. It's like trying to convince an 800-pound gorilla to go on a diet. It does not happen. There isn't even a basis for any constructive communications. The 28-year-old may be the smartest person in the world, and he may have the best ideas, but there is no way to communicate them to the people who can make a difference.

Similarly, how can the young, energetic, and brilliant Western staff members and financial geniuses from the Big Six (now probably Big Four) consulting and accounting firms communicate their ideas to companies that on a daily basis are faced with unrelenting bureaucracies and unbelievable corruption?

And as brilliant as they are, these individuals are usually on a two- to three-year contracts, have no roots or future in Ukraine, and are often more concerned about the opening of a new pub or the arrival of spring than they are about helping change the system. They are surrounded by a bevy of beautiful women, relatively low prices (in proportion to their salaries), an exotic environment, and a small and intimate community of their peers. What do they have to worry about? Certainly not the future of the Ukrainian economy.
Corruption: When Benjamin Franklin said: "when the people shall become so corrupted as to need despotic government, being incapable of any other," he could have been speaking about Ukraine. His words certainly reflect what is happening in Belarus. No matter how one slices it, corruption is the basic downfall of the present Ukrainian society; it is truly a cancer that is eating away at the core of Ukraine.

Sure, it exists in other societies, even in our own United States. But in Ukraine (as well as in Belarus and Russia) it has achieved a form of its own. It is corruption for the sake of corruption. Nothing works without it. You can't get one document from any government agency without paying a "fee" on top of the official one. In most cases the requests for "fees" are so blatant as to invite published schedules. Taxes are assessed not on earnings but on the "needs" of the individual tax collectors and their offices. In some cases, during particularly bad collection periods, tax collectors ask for "loans" for the budget which then are never repaid.

If Ukrainian authorities could collect taxes on all the "fees" that are collected, even at a 10 percent rate, Ukraine could probably easily pay off all of its debt and have a substantial surplus for the future.

No matter how much aid flows into the country, corruption will ensure that much of it will make it flow out just as easily.

Recently an official in Russia asked for a "fee" of $1 billion to push a certain project through. When asked if he knows what $1 billion looks like, he replied that he doesn't, but it surely would be sufficient for him to buy himself a few "necessities." The system is so ingrained from Soviet times, when workers were paid with whatever they could steal and trade, that it is difficult for a Westerner to understand how to change such a system.

However, if Ukraine is to take its place among European nations and if it is to be "trusted" by businesspeople, it must rid itself of this stigma. Fortunately, the present administration has started taking steps to stem this problem. But we fear the process may take a very long time.
Solutions: I once promised myself that I would never criticize anything unless I was able to offer at least some solutions or suggestions in order to make it better. In keeping with this promise, I humbly offer the following thoughts.

The theme of a science fiction book by an Australian author (whose name escapes me) was that the worst crime that could possibly be committed was lying. The premise was that, from this relatively simple crime, all others evolved. Similarly in Ukraine, the worst crime must be classified as "corruption." If this can be eliminated, then half the battle will be won. The rest of the economic impetus will come from the feeling of a new beginning.

"Don't send a boy to do a man's job." A cliché, sure, but very true in the case of Ukraine's system. Yes, it is extremely difficult to find good experienced people to go to countries like Ukraine and to devote a lot of time to the betterment of the system. But they do exist, and they are the ones who should be tapped to do the "consulting" work in Ukraine. They can truly communicate on a one-on-one basis with the existing authorities. They understand better what the other side can do. They have a "feel" for negotiations and strategies. They also command more respect in a society that has not yet caught up to the nerdy geniuses of the Internet generation.

When distributing aid, all agencies should look at who will be making the main decisions. If it is a Washington bureaucrat who has never put a penny of his own money on the line, his results will be far less effective than an individual who has been through all the pain, suffering and uncertainties of working with his own funds. Calvin Coolidge said it best: "Nothing is easier than spending the public money." How can a salaried employee who has never had to worry about his next paycheck understand the value of hundreds of millions of dollars that are meant as seed money to get an economy going?

Economists and professors are great at theoretical solutions, and they should definitely assist in the process. But the actual disbursement and control of the funds should be in the hands of individuals who have risked their fortunes and futures on new enterprises.

Surprising as it sounds, the successes or failures of entrepreneurs should never be the litmus test of their capabilities. Business is full of individuals who have tried and failed, and tried again, and then succeeded in their goals. As Georges Clemenceau once commented: "A man's life is interesting primarily when he has failed - I well know. For it's a sign that he tried to surpass himself." There are a multitude of individuals who have tried many things in Ukraine; many have not succeeded due to the system or other considerations - but these are exactly the types of individuals the various funds and Western governments should tap for their work and distribution of grants. These are doers, not theoreticians.

I have lived and done business in several "emerging countries" - among them Korea, Japan the Philippines, Thailand, Turkey, Egypt, Saudi Arabia, and even some places in the Pacific no one has heard about. In all cases, the process was virtually the same. But all the countries managed to emerge and prosper.

One thing for sure, things will improve in Ukraine. Of this I am certain. The question is will this occur in our lifetime, or will several generations have to suffer before we see what could have been.

Walter Prochorenko is a businessperson with more than 35 years of experience in international markets. He has traveled to, done business in, and lived in over 80 countries. Since 1994 he has concentrated on doing business in Ukraine in the real estate development and construction fields and has been involved in such unique projects in Ukraine as establishing the first golf resort, the first five-star hotel, and a Formula 1 track.

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