EDITORIAL BY STEVE FORBESOriginally published by Forbes
Putin is counting on a collapse of the Ukrainian economy, which is in shambles, to help Russia effectively regain control of the parts of the country he doesn’t choose to occupy. Ukraine is loaded with debt of Grecian proportions, and its currency, the hryvnia, is crumbling.
The most immediate step Ukraine needs to take is to set up a currency board, which would quickly stabilize the hryvnia. The government should have expert Steve Hanke of Johns Hopkins University come over right away to get the job done. Hanke has set up similar boards for Bulgaria, Lithuania and a host of other states. Under such an arrangement the hyyvnia would be tied to the euro. no hyyvnia could be issued unless they were backed by euros. The central bank would have no discretion.
The virtues of a currency board are brilliantly set forth in a Feb. 26 Wall Street Journal article by Judy Shelton, “A Currency Board for Ukraine.” Shelton is another rare expert who actually understands money.
Without a currency board the IMF will become an unintended ally of Vladimir Putin’s. Unfortunately the agency is clueless about how to effectively help a troubled economy. Its functionaries routinely prescribe higher taxes, devaluations anf the elimination of subsidies for countries with wayward economies. If a nation agrees to this toxic mix, the IMF will then give it supposedly lifesaving loans. the trouble is, this prescription severely harms any recovery.
Take the most pressing economic issue of the moment for Kiev: currency. The IMF, which has been around since WWII, still doesn’t understand that money measures value, just as scales measure weight and clocks measure time. Contrary to economic orthodoxy, money doesn’t control an economy. It meets the needs of commerce by facilitating transactions. Cheapening money no more helps achieve sustainable growth than jiggering scales helps reduce obesity.
If Kiev doesn’t adopt a currency board, it must defend the current euro/hryvnia ratio by buying its currency with foreign reserves. It should also reduce its monetary base by selling government bonds. The crucial factor here is that the government must not reissue the money back into the domestic economy, a self-defeating process called sterilization.
Ukraine should also reduce tax rates. It has a flat tax – of sorts (there’s a slight surtax on income above a certain amount) – 15 percent. It must not be raised. But the killer tax is the 38 percent levy on payrolls.
This should be cut in half, if not more, because its fuels tax evasion and discourages hiring. The government should also trim the corporate tax rate to that of Ireland: 12.5 percent.
There’s no better guide for internal structural reform than the World Bank’s annual survey, Doing Business. It measures 189 economies around the world by 11 criteria, such as the ease of starting a business and how difficult it is for businesses to obtain credit and receive reliable electricity Ukraine routinely falls in the bottom half of the survey’s ranking.
Subsidies for consumers? The IMF rarely understands that cutting subsidies in times of distress breeds even more political turmoil. Ukraine’s government, for the moment, should not tamper with its subsidies for natural gas.
We can’t keep Putin out of Ukraine, but we can keep out the IMF.