Speech at Academy of State Administration
Ambassador John E. Herbst
May 19, 2004

Thank you, Rector Luhoviy, for your generous introduction. I'm very pleased to be here at the Academy of State Administration to continue the tradition of American Ambassadors speaking to your students and staff, and to have a chance to engage in a dialogue. The work that you do at the Academy is of great importance for your country. Establishing the tradition of competent and well-trained public servants, who are committed to honest, accountable and transparent administration of governmental institutions, is vital for Ukraine's future. I know that today I am speaking to many of Ukraine's best young administrators, and I hope that what I have to say will be useful to you in your important work.

As all of you know well, the world has changed profoundly in the last 15 years. The end of the Cold War not only changed Ukraine; it marked the emergence of a new way of looking at the world, a new international system. This new international system is not so much about the military power of nations, as in the past, but about the way information, capital, goods, and labor move around the world. This new way of looking at the world is globalization.

Globalization is a phenomenon that has been hotly debated, even to the point of massive demonstrations against it. However, the protesters at meetings of the IMF or the World Economic Forum missed one important point: while there may be ways to mitigate what some see as harmful effects of globalization, there is no way to opt out of the processes of globalization without consigning your economy to oblivion. The economic and social processes of globalization, characterized above all by the speed of change, affect all of us in ways that were never before possible. More and more, countries and even individual companies must learn to compete in global markets. There is no going back to the past, no way NOT to be affected by global economic processes. This is the reality of today, a reality in which Ukraine finds itself and in which it must learn how to operate efficiently, so that Ukrainians will achieve and maintain a standard of well-being comparable to that of their European neighbors. That is the question that I would like to address today: can Ukraine compete in a globalized system, and is Ukraine on the right path to achieving that goal?

Over the long run, market economies have shown themselves to be the most efficient form of economic and social organization. This is even truer in an age of globalization. Over-centralization and a too-heavy state hand slow down and distort the market system, reducing efficiency and competitiveness. In today's truly global economy, investors, buyers, and even labor may simply go elsewhere if conditions in one place don't allow them to work efficiently. Many studies of economic development and growth, especially of emerging economies in Asia and central Europe, show that economic performance depends not only upon sound national economic policies, but is also closely tied to such political factors as the rule of law and protection of private property rights. To achieve success, good governance must go hand in hand with wise economic policies. This is particularly true for countries like Ukraine, which has only recently emerged from an inefficient, over-centralized economic and political system.

Ukraine regained its independence at a time of great change in the world, and Ukrainians, by demanding their independence, helped bring about one of the most important changes, the break-up of the Soviet Union. This break-up opened the way to the transformation of the economic and political system of the former Soviet republics and the countries of central and eastern Europe. The transition of these countries to market economies and democratic political systems has proceeded at different rates of speed and has achieved varying results. Looking at Ukraine, we see striking successes, but also problems that are holding back Ukraine's progress.

Ukraine has had some major successes in transforming its state-controlled economy into a market economy. One of the most important achievements was the establishment of macro-economic stability. Putting the government budget and the economy as a whole on to a cash basis was the turning point of reform. This has allowed Ukraine to cut its budget deficit, lower inflation, stabilize the currency and reduce wage arrears. These moves put cash into the hands of citizens, allowing them to buy goods and services and stimulating domestic demand that in turn has fuelled economic growth.

Ukraine has made some of its greatest strides in reforming and restructuring the agricultural sector. A basis has been created for a land market and the government role in marketing agricultural supplies and commodities was greatly reduced. We see the results of these policies in the emergence of a vibrant and competitive private sector in agricultural trade and in increasing agricultural output.

Ukraine has made major progress in privatizing state-owned industry, especially small and medium companies, which are the foundation of a vibrant private sector.

Ukraine has made substantial progress in legal reform. It has passed a land code, a civil code, a mortgage law, banking reform laws, and a host of other needed legislative changes. Ukraine has also begun to establish a series of regulatory bodies that can help the market work more efficiently.

In the last year Ukraine has made rapid progress toward accession to the World Trade Organization. It has completed a number of bilateral agreements, and secured Working Party agreement to begin its report-the final stage of accession.

Ukraine also has begun to make needed investments in repairing and expanding infrastructure.

All of these achievements have produced concrete results. The Ukrainian economy has grown steadily and strongly for four years. Personal incomes are rising and poverty levels are falling. Domestic investment has grown robustly, creating the foundation for future growth. Foreign investment has also grown, bringing new technology and management skills to Ukraine. Trade has grown even more rapidly than the economy as a whole, strengthening Ukrainian links with the world at large.

The record of success is impressive. But much remains to be done for Ukraine to realize its exceptional potential. Many of the steps that need to be taken are related not just to economic policy, but also to good governance. Good laws and good policies are not enough, without efficient, honest and transparent work of the state bureaucracy at all levels to carry out these policies.

Tax policy has been reformed, but tax administration, including the handling of VAT refunds, remains one of the most serious obstacles to doing business in Ukraine.

Earlier impressive reforms in the energy sector have halted and even reversed. As a result, this key sector often answers more to political expedience than to market needs.

A number of large entities have yet to be privatized, and we will watch closely the transparency and fairness of the process. Telecommunications will be especially important, since this is the linchpin of a modern economy. While growth of cellular telephone networks has been impressive, line-based communications will remain vital to communications development.

The land titling process must be completed rapidly and efficiently in order to secure property rights for landowners and to ensure that when the market for land is opened, this act does not become the starting gun for a race to exploit smallholders. Local administrations that put bureaucratic obstacles in the way of land titling should be put on notice that such interference will not be tolerated.

The government should take care to preserve previous agriculture market reforms and should keep the role of state bodies in the land market to a minimum.

A fair and transparent legal system is essential for economic development. Legal reform was begun in Ukraine; it is time to complete it. The conflicts between the Civil and Commercial code need to be removed, and in a market-friendly manner. A joint stock company law is desperately needed to secure shareholder rights and improve corporate governance.

Regulatory bodies should strengthen their management and independence. Most importantly, the judicial system needs to become more effective and independent to ensure that the law is implemented fairly and consistently.

Despite Ukraine's high level of trade, many bureaucratic barriers to trade remain. In a global economy the speed of transactions is crucial. Lengthy delays in customs clearance, certification procedures, and other trade transactions can quickly render a market uncompetitive.

Ukraine clearly still has barriers to foreign investment. The lack of an international hotel in Kyiv, despite great international investor interest, is a striking indication that the market is not always working.

Entering the World Trade Organization is a goal that is achievable, soon, if Ukraine maintains its commitment to make the needed changes in its trade regime. The WTO encompasses over 140 countries and over 90% of global trade. It is clearly in Ukraine's great interest to join as soon as possible.

Some authoritative international economists see Ukraine on the path to continued economic growth and greater integration into the global economy, including joining the WTO. But they offer one important caveat. Ukraine's failure to strengthen democracy and the rule of law could derail its economic success.

Investors both domestic and foreign will measure the risk of putting their money and effort in doing business in Ukraine. A democratic system that allows citizens and businesses to influence policy and its implementation in clear and public ways is a much safer and more attractive place to work and invest.

It is very difficult to develop and maintain a true market economy in a non-democratic system. Just as democracy is about letting citizens make choices about how their country is run, free markets are about letting citizens and businesses make their own economic choices. The two go together, because both are about trusting people to make their own decisions, about treating citizens like responsible adults. And it does not make sense to trust people to make economic choices but not political choices, or vice versa.

Open markets and globalization further expand this freedom of choice. It gives both producers and consumers more choices. It gives citizens more information about more ideas, expanding their range of possibilities.

Free markets and democracy are mutually reinforcing. Market economies can lead to democracy by creating and distributing power to those outside of government. Democracy supports market development by improving the rule of law and reducing corruption. Democracy gives a voice in shaping and overseeing government to a wide variety of market players including producers, labor groups and consumers.

A country's success in establishing democratic institutions, strengthening the rule of law and the accountability of elected and appointed officials thus can have great influence on its economic performance. Similarly, its openness to international markets and its participation in international economic, trade, political and security organizations demonstrate its readiness to be a reliable partner, one that understands and shares the values of other liberal, market economies.

Ukraine has built increasingly strong relations with Europe and Euro-Atlantic institutions. The Distinctive Partnership with NATO, launched in 1997 and the NATO-Ukraine Action Plan, concluded in 2002, charted the way forward for Ukraine to strengthen its relations with NATO. Similarly, Ukraine's Partnership and Cooperation Agreement with the European Union provides for regular dialogue on issues of mutual interest. Ukraine's participation in the OSCE is also an important sign of its acceptance of European standards on a broad range of issues.

And Ukraine's cooperation in the war on terrorism, including contributing one of the largest contingents of troops to the stability effort in Iraq, show its ability to participate in improving global security.

Today, Ukraine is, in many ways, at a crossroads. Will it be able to continue its strong economic growth? Will it move closer to Euro-Atlantic institutions, and to further integration in the global economy? This will happen only if Ukraine takes a hard look at its political choices and makes the right decisions.

The October 2004 Presidential elections could be the beginning of a bright, new era for Ukraine. The elections must meet accepted international standards; they should be free, fair and transparent. There should be a level playing field: all candidates should have equal access to media; parties and candidates should be able to organize meetings and rallies in all parts of the country without interference; the election process itself should be carried out in accordance with the law, and in the presence of Ukrainian and international observers. A president elected under such conditions would have legitimacy both at home and in the international community. The United States-and I am sure other countries-would be prepared to work closely and productively with whomever emerges as president as the result of a free, fair and honest electoral process.

Unfortunately, there have been discouraging signs in recent months. Meetings and rallies of opposition parties have been disrupted and businesses with ties to the opposition have been harassed by the tax authorities. Independent media have come under increasing pressure, including closure for alleged tax violations or licensing problems. Threats and harassment of individual media owners and reporters continue.

Recent local and regional elections have been marred by severe problems, particularly the use of "administrative resources" by local and regional administrations to support candidates they favor. In the most blatant example, the April 18 mayoral election in Mukacheve, the territorial election commission disqualified 6,000 of 19,000 votes for the opposition candidate and declared the pro-presidential the winner. The U.S. government does not believe that the result announced by the territorial election commission reflects the will of the voters of Mukacheve; we have welcomed President Kuchma's call for an investigation and continue to hope-despite early signs to the contrary-that this investigation will lead to rectification of the fraudulent result.

That such serious violations of the rule of law and abuse of democratic processes are taking place only a few months before an election that will have profound consequences for Ukraine's future should make all Ukrainians stop and think. Is this the Ukraine that can attract international investment, join the World Trade Organization, and take its place in Euro-Atlantic institutions? Informed opinion would say, "most likely, not."

On the other hand, Ukraine still has a choice. Free and fair elections in October and progress on strengthening rule of law and democratic institutions can go hand in hand with continued economic growth and progress. The Presidential elections will offer a unique opportunity, because world attention will be focused on Ukraine. Ukrainians will have a chance to demonstrate their commitment to the values of democracy and free markets. We hope that this is the choice that the government and the people of Ukraine will make.