The stronger a state power, the weaker and more susceptible the country they lead. This is what Thomas Grennes, professor of North Carolina State University and guest professor of Stockholm School of Economics, concludes in his research. The reason why Ukraine became a prey of Russia is that in the last two and a half decades, every Ukrainian government insisted on the ideal of a strong state. They did not allow approve economic and financial reforms – that could make the country stronger and more resistant – because they were concerned about the corruption which made them and their clients rich. This has led to Ukraine’s current situation, and this is going to be the fate of any other country thinking and acting alike, for instance Venezuela, and Argentina. According to Thomas Grennes, the point is: the weaker the state power, the more resistant the country against external and internal threats.
Péter Zentai: On the blog of the world’s most well-known economists and financiers, the Economonitor, you constantly share the results of your economic-financial and state structure researches according to which the Ukrainian failures are not Russia’s and other external forces’ fault, but its own. Why is that?
Thomas Grennes: Ukraine became independent at the beginning of the 1990s. At that time, its per capita income was almost identical to Poland’s, which was about to leave the communist era behind as well, and to Estonia’s along with the other two Baltic states’. The negative legacies of the Soviet Union did not affect these countries more than Ukraine. Today, they are still relying on Russian economic and energetic relations.
But Poland and the other Baltic states have surpassed the richer Ukraine in the last twenty five years: today, the GNI and proportionate national income of the Baltic states are twice the Ukrainian.
However, Ukraine – not like the above mentioned countries – could not join to the European Union. This is not the Ukraine’s fault.
Our researches clearly show that the reason for Ukraine lagging behind and its extreme vulnerability is that the consecutive governments did not institute any economic and political reforms in the last twenty five years. They had a single characteristic in common: neither of them wanted to change the centralised state structure. The whole institution system, including the central bank as well, was used – and is used today – by the Ukrainian elite to enrich themselves and their clients. The country’s emblematic companies, such as the energy giant Naftogaz were preyed upon by the political elite–with no respect to whether the companies were nominally privatized or not. Public institutions and primarily the central bank were used for no other reason than to pump out a considerable part of the country’s wealth and its national income. This mechanism continuously recreated itself and regularly created hyperinflation periods.
Based on your researches, you believe the key to economic and political reforms would be the decentralisation. However, the new Ukrainian government – even though they say they are committed to reforms – refuses to weaken the role of the centralised state.
They are referring to the Russian threat, saying: ‘if we let public institutions weaken, and give independence to Ukrainian regions, then the country would fall apart and be in the hands of Russia.’
Actually, the decentralisation and the reforms coming with it would prevent the collapse and falling apart of Ukraine.
Sustaining the centralised state keeps weakening the country’s economy, making it vulnerable. The forced maintaining of the subsidised (energy) prices being communicated as something of people’s interest – but in fact, it is one of the foundations of corruption mechanisms – makes us understand why Ukraine became so vulnerable to Russia.
So, basically, the corruption mechanisms, that were essential for the running of the state, are what doomed Ukraine?
If this is the situation in Ukraine, then how do you explain the success of other, mostly Asian countries that are also centralised, where the government has a major role in the economy, and their leaders are said to be corrupt?
Europeans, who say that Taiwan, Indonesia, Singapore, South Korea, and China are successful, are simply misleading. They want to prove that ‘corruption, if it is kept under control, is a tool of national success. The key to progress is the ability to lead a country with firm leadership, and essentially, central control.
But the countries mentioned above are evidences for this…
They prove quite the opposite! In Taiwan, Singapore, Korea, Indonesia, and Malaysia, economic progression and success have become more pronounced as they become more decentralised and liberal – essentially, they started to fight corruption effectively and publically.
Today, Singapore, Hong Kong, Korea, and Taiwan have become the world’s most open and liberal economic bastions. They are amongst the top in the international ranking – by independent experts – which is based on the transparency of economy, and the comfort of foreign and national investors. Compared to these countries, China – even though its position is improving every year – is lagging behind. Since Hong Kong, Singapore, and China are inhabited by Chinese; they basically belong to the same culture, experience shows us that there is no corruption in Singapore and Hong Kong, unlike in China. Both Koreas are inhabited by Koreans, however not matter the common roots and history: in the state-bureaucracy led North Korea, corruption is infamously high, while in South Korea, where the state’s role in economy and finances is deliberately reduced, it is almost non-existent.
The significance of common cultural origins and the ethnic or religious identity are marginalized in the success of a country.
The countries that had a common destiny in the last decades must have a role in the success or failure: the countries of the former Communist bloc are still more impoverished and corrupt than those European countries where after the end of WWII civil development is continuous.
In Estonia, in the early 1990s, both foreigners and nationals felt that everything goes smoothly without bribing, while in the other two Baltic states, Latvia and Lithuania – if someone wanted to achieve anything – bribing the officials became a routine – and in each country the influence of the common Soviet past was still very much alive. But – and this is the explanation – while Estonia, right after becoming independent, was included in the Scandinavian and other Northern countries’ free trade area, goods and services started to flow between Estonia and the western world – rendering corruption pointless, unlike in Lithuania and Latvia, where free trade was still restricted by bureaucracy for several years. Obviously, in these countries, the bribing – as a heritage of the Soviet era – still continued. However, eventually the three countries joined to the European Union, which is based on the free flow of capital and labour; and after the great financial crisis, they established the most liberal and open economic system in the world. They essentially cleared up corruption in countries that three decades ago were parts of the world’s most corrupt country, the Soviet Union.
Every research carried out by us, and other economists around the world indicate the same: where the barriers controlling and restricting economy are removed, corruption will ease or even stop. The cyclical economic and financial crises will not have so severe effect on these countries. However, where the centralised state structure is still maintained, institutions are acting according to a central will, and the state remains the major economic player, corruption will be overwhelming. These factors will decrease, and eventually stop economic growth, and in the end, destabilise the country, making it vulnerable to internal and external threats. This is exactly what we see today in Venezuela and Argentina. However, in China, after realising this, the leading political powers delivered that ensuring the rate of economic growth, and increasing welfare requires more decentralisation, greater economic liberalisation; and allowing economic players to act freer while reducing bureaucracy will decrease corruption, making the country less vulnerable.