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Prof. Reinert interviewed on Ukraine's development
Ukrainian Week (UW): In your book, you wrote based on historic examples, how rich countries got rich thanks to protectionism and desire to be equal with others, rather than through free trade. One of your arguments is that a free trade area should be created with equal partners. Today, the EU free trade area comprises very different countries by economic development – look at Latvia or Bulgaria. What should they do once they’re in the rich club?
Erik S. Reinert: I think there is a very old rule. The person who expressed it the best was the German economist Friedrich List. He said that opening free trade between countries that are equal would help them both grow. I think the best example is Norway and Sweden that are both small countries. Norway was a latecomer and was protecting its industry for many reasons. When they reached the same level, they opened free trade and became each other’s best customers. That was even so in spite of both being very small countries.
But speaking about the EU enlargement in 2004, the most advanced industrial countries there, for instance Hungary and Czech Republic, which had already started integrating with the West before the fall of Berlin Wall, did reasonably well in the process. On the other hand, there were the countries, integrated but de-industrialized. The problem with these countries is that outward migration is the safety mechanism – if the trade balance does not work and the country is de- industrialized, people move out. Take Ukraine as relates to the EU – you still have a chance, because you are not a member. It’s much more difficult for Latvia. Ukraine still has some possibilities for negotiating. Then, I think, you should say you want to be treated like Spain in the 1980s. This means slow integration in a way that does not cause de-industrialization.
UW: Over 20% of Ukraine’s exports go to Russia (26.3% in 2013), which makes it an important trading partner. Yet, it has turned into a threat in every sense given the current situation. How should Ukraine further deal with trade with Russia?
ER: It is important that Ukraine recognizes the big dilemma it is facing: what makes sense politically, mainly joining the EU, does not necessarily make sense economically. If we go back to the theory of Friedrich List and how the EU worked up until the 1990s, I am almost afraid of saying this, but economically it would make more sense to integrate with a more similar economy, like Russia’s. However, that doesn’t make sense politically, I can see that. I think Ukraine should use that dilemma to negotiate a better deal with the EU.
The important thing is that you nationally recognize your dilemma and use that as a leverage point when negotiating with the EU. You know the important sectors of the Ukrainian economy. They should be protected and the entry into free trade should be gradual while at the same time allowing you to get cheap capital to upgrade technologically. The dilemma in the periphery is often that labor is very cheap and capital is very expensive. So, you need a development bank, which can actually supply capital at the low rate. Here you can learn from Brazil.
UW: You speak of the EU’s de- industrialized periphery. What about Estonia and Poland, successful new EU member-states?
ER: Estonia is relatively successful. It is very successful comparing to Latvia and Lithuania, but there is lots of poverty still if you move outside of Tallinn. Poland is successful for three reasons and probably the most important one is that it kept its family farms. In 1956 there was a big uprising in Hungary, but there was also an uprising in Poland when the country refused to collectivize agriculture. As a result, it ended up with lots of small family-owned farms that have an important task in the economy. When things are good the children go to the city, go abroad and work, and when there is no job in the city or abroad they can come home and live on the farm. This means one more pair of hands in the potato field. This may not be terribly efficient, but socially it works very well.
The second advantage that Poland has, and it shares this with Ukraine, is a big market. The third advantage is that it managed to keep its zloty – so when things are bad in Poland, its currency goes down. Avoiding the euro is very important. It’s like in a boiler, where you have the safety valve. In case something is wrong, the safety valve opens. In national economies this safety valve is devaluation. When things are bad the value of your currency goes down, and you become competitive again. That has been a very important mechanism for hundreds of years. What the euro has done is that it plugged that safety valve. The euro started as an idea for currency between the rich countries of the EU. The bad idea was to get in Greece and other poor countries with completely different economies. That is a big disaster.
One important thing for Ukraine is that it’s a big market and Ukraine has traditionally been the bread-basket of the world. When I go back to reading American economic texts from the 19th century, the US felt that its competitor on the world grain market was Ukraine. So, this is a very important tradition and the strength, but the problem which I think is worth getting into is that agricultural subsidies to the new members of the EU is – as I understand it – are about half of what of the old members of the EU get. So you risk entering the EU as a union where German and Dutch farmers with cheap capital get much more subsidies than Ukrainian agriculture.
UW: In your book you present the experience-based economic theory in contrast to the model-based one. To what extent does the geopolitical position influence economic development, economic structure and success of the country?
ER: Traditionally, all countries have followed this experience-based economy in order to get rich. Emulation was the name of the process. For example, when England tried to emulate Holland, it tried to copy it and protect its industry for hundreds of years. When the country gets rich, economic theories typically change. You start believing that it is the market that did the job.
Friedrich List coined the term “kicking away the ladder”, which means that when the countries be- come rich, they throw away their old policies which they do not need any more and this is like kicking away the ladder, preventing other countries from using this tool too. This is the classical case now in Germany. I think it is a serious ethical problem at the core of the EU, which no one wants to talk about (and I mentioned it in the book).
After WWII, the US Secretary of Treasury Henry Morgenthau introduced a plan whereby Germany should have been de-industrialized because it had caused two wars in less than 50 years. The Morgenthau plan was to de-industrialize Germany. Then, Germany was saved by former US President Herbert Hoover who understood that old link between economic structure and population density. Hoover convinced the US that in a de-industrialized Germany there were 25 million people too many, and they would – Hoover wrote back to the US – have to be exterminated or moved somewhere else. Hoover’s calculation assumed that a de-industrialized Germany would not be able to sustain a higher population density then France. Germany was saved by this calculation and it was allowed to re- industrialize under the Marshall plan.
The problem now is that Germany which was saved by the Marshall plan a generation ago, imposes Morgenthau plans on the EU periphery and the third world. When you are rich, you say that the market solves all your problems, and forget about economic policy. Interestingly, Germany that was one of the last countries in the 19th- century Europe using this policy of Friedrich List to get rich and using it again after WWII, now denies the same policy that saved it to the EU. It’s a serious ethical problem and I raised it in a recent book in German.
So, the geopolitical situation is important. During the Cold War it was important to stop communism and the US and the West understood that the way to do this was to make people so rich that communism was no longer an attraction. So, the Marshall plan was extended like a belt round the communist countries – from Norway to Western Europe, to Spain, Portugal, Turkey, Taiwan, Korea, all the way up to Japan. Latin America was allowed to industrialize in the same way, under protection. With this plan and with the policies to industrialize it the belt of rich and industrialized countries hindered communism from extending farther. It was a very successful policy. So, you can say that existence of communism was very helpful to the periphery. The sad thing now is that there is no more communist threat in that sense, so the West has forgotten the kind of policies that were allowed in order to stop it. I am afraid that Russia will not play that role again.
UW: Russia is a political, military and economic threat to Ukraine. Could having such a threat make Ukraine more prosperous, as Ukraine needs to develop itself strongly to counter it?
ER: If you can convince the EU about the arguments I apply, that could happen. You can say that Ukraine is a bit like Berlin during the Cold War. Berlin was an island of capitalism surrounded by communism and enormous amounts of money poured into the city in order to save its economy. In the case of the Ukraine this kind of money must be used for rebuilding the economy.
So, I think Ukrainian strategy should include a position whereby you say that you will be a much easier target for Russia if the EU allows you to be poor and de-industrialized. The EU should copy the successful containment strategy against the Soviet empire during the 1950s onwards. The best way for Ukraine will be to rebuild the industries that are similar to Russia’s. Then people will identify themselves much more with the West and instead of migrating there, they will stay at home because they will have jobs in Ukraine. It can be an argument for the development of Ukraine. I think the parallel with the Morgenthau and Marshall plans is a good one. You should be able to convince the Germans that you are in a situation like Germany was just before the Morgenthau plan.
Prof. Erik S. Reinert is a Professor of of Technology Governance and Development Strategies at the Chair of Innovation Policy and Technology Governance at the Ragnar Nurkse School of Innovation and Governance. The Interview was conducted by Olha Vorozhbyt and it first appeared in the Ukrainian Week, both in English and in Ukrainian. It is also published in the Nurkse School Ideas Bank.
