Is the Honeymoon on Ukraine over?

Is Ukraine lost? Again? Is the social contract between state and citizens fundamentally flawed?

We are now well past the "honeymoon period" of the post-Maidan street protests that ultimately led to the rather fast departure of the then president Yanikovich, who fled to Russia in 2014. Has the halcyon beacon of the EU helped to reshape the rampant political and economic corruption?

A spate of ministerial resignations at the start of 2016, an economy in dire straits and with a huge external debt overhang, having lost up to a third of its economic base from the loss of territories and ongoing conflict with Russia and being supported by western-supported IFI packages including dollops of soft EU macro-financial assistance, having witnessed a false dawn with the so-called Orange revolution in 2004 and the Maidan of 2014, which way reform?

Before I answer these questions, I invite you to view this video of a recent Cabinet meeting - it is fairly X rated... and unlike anything many who have attended any Cabinet meeting anywhere will have experienced. And it gives a flavour of the difficulties of copy-pasting a reform agenda without genuine political will and huge conflicts of interest without a fundamental reform of the current political system.

Many will have recognised a certain Georgian, Mikheil Saakashvili,who was former president of Georgia and now part of an "A Team" of former Georgian bureaucrats, fluent in Russian, brought in to help support the reform effort and given Ukrainian citizenships jousting (with glasses of water) with the Minister of Interior responsible for the police and security services,  himself an "oligarch". Oh yes, the Minister of Finance is originally American and the Minister of Economy - one of the key "reformers" Lithuanian-Ukrainian.

Now back to the questions. 

My starting point is to look at the data. And the picture is mixed. The odd-but-thus-far working relationship between the Prime Minister and the president has led to macroeconomic stabilisation - supported by strong western support - and important steps to liberalise the economy and reduce red tape. Global Governance indicators (that basically hoover up all available country risk indicators published) do show that Government Effectiveness has risen as shown in the figure below.

But Rule of Law?

Not so good - in fact its even worse. And the picture is the same when looking at Regulatory quality or perceptions of corruption. 

Ukraine’s minister for economic development and trade, Aivaras Abromavicius, announced his resignation in early February, citing corruption levels in the state.

“Neither me, nor my team have any desire to serve as a cover-up for the covert corruption, or become puppets for those who, very much like the ‘old’ government, are trying to exercise control over the flow of public funds,” effectively saying what many have been complaining about, that there are too many bent officials trying to continue their corrupt ways - and of more significance, that things aren't really getting any better.

There is now a real political risk that the government will fall, possibly through a vote of no confidence. Polls have given it approval ratings of less than 10%. And there is scant evidence, despite a flurry of ad-hoc measures, that there is a clear roadmap of reform  - which is worryingly familiar territory given previous false dawns and stabilisation plans effectively written at the IMF.

Despite a huge groundswell of popular support in what remains of Ukraine for a pro-EU direction of travel, it is not an EU candidate country forced to go through hoops and checklists to comply with the EU body of law, the acquis.  

And the EU's efforts beyond financial help has led to little material effect thus far. The European Commission is great if there is a natural disaster that requires fast response or when there are longer-term structural adjustments through sector plans and the like as witnessed in the enlargements of 2004 onward for the former central and eastern European economies. Less so in dealing a country that is in need of a mix of quick-win reforms and deep reform, often painful for vested interests.

It is perhaps too early to assess if the social contract is broken. But walk past the parliament in Kiev, the Rada, and the side street and its car park are full of Bentleys, Rolls Royces and Porsches when the average salary is a few hundred dollars. 

The disconnect between the elite and the rest is the effect, but the fusion of political and economic control in the hands of this narrow elite that is an unfortunate legacy in most of the ex-Soviet space is THE core root cause. 

What then are the choices for the West? One for another day, but ultimately, the sad truth is that ultimately, political ownership for reform cannot be imposed. On the other hand, if there is a serious set of governance concerns and dysfunctional system that effectively limits democratic voice and accountability then a further Maidan cannot be ruled out. For the West, the EU and the US, we have to be more sanguine and realistic of expectations, but to have more targeted conditionality - political and economic. 

QE2, Pyrrhic Monetary Policy and a Rise in Inequality

Are Central Banks running out of firepower?

And is the second bout of QE or QE2 leading to both an arms race in competitive devaluations and more worryingly, actually accelerating inequalities?

With policy rates close to zero and years of money printing under the snake-oil terminology of "Quantitative Easing", moribund fiscal stances and private sector balance sheets in rehab zone, what more can central banks do to kick start inflation, if not growth trajectories?

No sooner had I suggested that I was against-trend in forecasting a baseline of no change in UK interest rates this year than we're faced with a change in mood music across the developed world and forecasts of more monetary easing or QE and even negative interest rates set by central banks.

Whilst the aim is to get cash to shift to production, investment and consumption by effectively taxing cash balances held by banks, in reality we are seeing plenty of unintended consequences:

1. a greater incidence of financial and asset bubbles as cheap dosh chases higher yields - from property to stocks and financial assets (the short term excluded). This most will go with.
2. this in turn is I would argue actually widening the gap between the haves and the have-nots, be it within countries and globally.
3. for another day...a rise in competitive devaluations: a falling Yen, a falling Chinese currency and others will follow - from SE Asia to commodity producers. 

We hear plenty of research analyses that highlights a global phenomena - from the US through to the emerging economies - of an increasing inequality of wealth creation and ownership to a narrow group of economic players. Be they the kings of Silicon Valley, robber barons in Eastern Europe or the industrial titans of Asia, the pattern is uniform.

Oxfam's recent report came out with stark figures by countries but a headline one that is numbing to review - 1% of the global population have a wealth greater than that of the rest of the 99% in the world. The same conclusion came out broadly in the OECD's recent 2015 paper and notes "Income gaps are even more striking when it comes to the highest earners. In the 1980s, the top 1% of earners commanded less than 10% of total pre-tax income in every OECD country bar one. Thirty years later, their share was above 10% in at least nine OECD countries and above 20% in the United States."

 There are fundamental reasons in terms of basic governance, fundamental democracy and rule of law that explain many of the fissures in developing and emerging economies that prevent citizens from having rights to education, restricted access to financial capital and in some cases, as we see in north Africa and middle East,  access to education but limited opportunities to find employment. But we also see great strides by countries such as China and SE Asia on the back of growth and growth-based economic models.

Rising inequality is somewhat counter-intuitive when we think of the global reforms since the nineteenth century and following the two world wars, the rise and fall of communism and the rise of the welfare model in the post-war period. And whilst it may be less of a relative issue in the EU, rising inequality is a factor that may explain the political counter reactions from the anti-capitalist Occupy Movements in Wall St and the City as well as the drama that is the US election cycle. 

What are the policy lessons?

• The OECD's focus on structural issues - gender, health, education et al - is the classical development tool kit. They are longer term.
• A clear lesson in today's 24-7 world is that interconnectivity is here and exponentially increasing- be it in ideas, news or alas, contagion - financial fear and medical as we witness for the Zica virus. The corollary of this that international co-ordination cannot be ignored - be it in terms of global efforts to tame disease or economies. It also means sector and country risks are subject to a wider set of risks.
• Loose Monetary Policy is ultimately pyrrhic without a looser fiscal stance in an environment, as a century before, to take up slack. 
• Openness to innovation and growth and allied reward for risk takers cannot be compromised - but it needs to be complemented by efforts to ensure equity and fairness so that "everyone eats a bigger slice of a bigger cake"  - moves in the EU to tackle the Googles, Amazons and Cafe Neros of this world on dodgy tax affairs is part of this.