Introduction Janusz Szyrmer HARVARD/CASE UKRAINE PROJECT This monograph is part of a series of books covering various aspects of the decade of Eastern European transition, with a focus on Ukraine. The book’s chapters, as presented by their authors, are in fact the result of a collective effort – research, brainstorming sessions, and open seminars – on the part of Ukrainian and foreign economists associated with the Harvard/CASE Ukraine Project (HCUP). Several of the ideas in this volume have been presented before in the form of various analyses and recommendations to Ukrainian policymakers, and thus have already contributed, directly or indirectly, to Ukrainian policies and reforms. 1. Market of ideas Due to financial constraints, Ukraine’s capacity for actively supporting both basic and applied research and publications remains low. Professional books in economics and economic policy, including those on post-Soviet transition, remain in short supply. The importance of this research deserves attention and support from Ukrainian authorities and international donors.1 Reforms 1 In contrast to some other CEE countries, the number of books providing solid research on the Ukrainian transition is modest. These are important publications. However, international donors, willing to finance costly reforms, are not providing sufficient support for the acquisition and diffusion of the knowledge required for implementing the reforms. 2 Janusz Szyrmer undertaken in Ukraine are complex and expensive and, to be successful, require much conceptual and analytical effort.2 Comprehensive research publications, in addition to – but not instead of – detailed policy analysis papers and ad hoc policy notes, are needed to formulate and implement well designed reforms. Our books are published with the aim of making our contribution towards this end. In order to develop the competitive market of products (goods and services), a parallel development of many other “kinds” of competitive markets is necessary, such as the bonds and equities markets (stock exchange, sale of enterprises), currency and debt, real estate (land), labor (including a management skills market), technology, social and political activities (NGOs), institutions and policies, and ideas. A decade of experience with the post-Soviet transition demonstrated that all of these markets are indispensable for successful reforms. Moreover, they are closely interrelated and tightly interwoven, being both mutually competitive as well as mutually complementary. They are mutually competitive, while for striving for the attention of policymakers and scarce resources; for example, major institutional reform efforts must often be undertaken at the expense of investments into new technologies in the public sector. To provide another example, comprehensive land (agrarian) reforms are likely to produce a short-run negative effect on agricultural produce market. They are also mutually complementary, since they remain in strong symbiotic relationships and the development of each one of them requires the development of all of the others. Investments in new technologies require good institutional arrangements; good institutions are made possible by good policies, and good policies, in turn, are made possible by good institutions. Both good institutions and policies demand good ideas, while good ideas are generated by a strong research base, active and competent civil society (NGOs), and so on. Neglecting any of these markets impedes the development of the entire lot. A weak and malfunctioning land market, because of opposition to the private ownership of land; or equity market, as a result of a nontransparent stock exchange; enterprise market, because of corrupt sale procedures; management skills market, arising from distortions introduced by the closed stock status of many corporations; labor market, because of laws protecting unproductive work; foreign exchange market, as a result of the absence of an operational currency exchange; or a weak and poorly 2 Kyiv National Economic University professor Mykhailo Savluk argues that the notion that “U.S. universities are rich because the state is rich” is incorrect. Rather, “the country is rich because its universities are rich” (Gennadiy Neverov. Ukrayina Business (Ukrainian newspaper), December 21, 2000). Introduction 3 functioning ideas market, thwarted by the lack of reliable data and research capacities; etc. spill over to other markets, undermining each one of them and the entire transition process. In other words, if one market performs worse than the others, the whole process remains sub-optimal. In fact, we would be better off by allocating more reform effort to the development of this under- performing, laggard market, and less effort to supporting those that are already more developed and performing better. For example, the effectiveness of various privatization efforts could be restricted by the absence of a properly functioning stock and management markets. Likewise, technological improvements in the energy or agricultural sectors are of little use without fundamental institutional reforms. Similarly, it makes little sense to require the introduction of market prices (cost-based) for municipal utility services when the institutional and technical infrastructures are not in place. Great and wise efforts across the entire spectrum of these diverse markets are necessary in order to successfully replace the old, rigid, predominantly vertical structures with new, horizontal, competitive and flexible structures. Interestingly, the neoclassical concept of allocative efficiency applies here as well as in standard factor allocation problems. Markets are institutions and institutions turn out to be very important production factors. If there are differences in the “marginal productivities” of these markets (i.e., in the levels of their performance), then the basic requirement for allocative efficiency is not satisfied and the transition process becomes inefficient. There is also not much point in implementing a new law or policy if there is no “critical mass” of political leaders, economic experts, and population at large who understand the underlying rationale of the law or policy and support it. For example, insisting on abolishing an export duty, if most local experts and political leaders believe that the duty is good for the country, is not the right strategy. In other words, if proper efforts are not made to collect data, do research, publish materials, provide explanations, and conduct information campaigns, formal legislative efforts will be unproductive. Perhaps the most important lesson we learned during the last decade has been that a narrow technocratic approach to reforms and the mechanical adoption of standard western market-oriented policies will not work unless broad changes are introduced in social and institutional environments in terms of both formal and, most importantly, informal institutions. Information and knowledge, and their use in policymaking and investment decisions, turn out to be fundamental growth factors. In transition economies, information and knowledge become the main driving force for 4 Janusz Szyrmer reforms and growth, rather than labor, capital and technology, although the latter, rather than the former, are used as standard explanatory variables in textbook economic growth models. An efficient market of ideas is a sine qua non for a successful transition. The effective execution of transition-related policies, foreign aid initiatives, etc. require knowledge and reliable information. Moreover, we must know how to allocate both the efforts and the funds, and must be able to formulate useful, realistic and meaningful tasks, i.e., reasonable targets or benchmarks. The reform process cannot be conducted in a void: it needs a variety of government data-collection and research units, diverse economic monitoring efforts, active academic institutions and NGOs, conferences, seminars, and publications all of which contribute to a competitive market of ideas. This in turn creates an environment in which many questions are asked, and answers to these questions are sought; and in which policy and reform initiatives are formulated, and their implementation evaluated. Thus, to do it right, a rich intellectual infrastructure is required. There must also be far reaching improvements in the availability of accurate information at both the microeconomic and macroeconomic level, without which it would be impossible to invest efficiently in the economy and implement effective policies. Painful problems related to corruption, the black market, low fiscal discipline, weak contract enforcement, inadequate private property protection, low capital investment, and inefficient foreign aid cannot be solved without major improvements in the area of information and knowledge. 2. Project closure Currently, as of May 2001, the Harvard/CASE Ukraine Project is in its closing stage. It remains operational at a low level, with an extension under the auspices of CASE, Warsaw, which has been made possible by additional funding, provided by USAID. Our main task now is to finalize various project activities and to publish a few monographs, including this volume, presenting the Project’s results. For some of us, this Project has meant a lot, and perhaps, in a way, has given our lives more meaning. We did our best to help a country of some 50 million inhabitants establish and strengthen its links with developed western countries; to improve its knowledge