Poor Ukraine

March 04, 1994|By STEVE H. HANKE

President Leonid Kravchuk of Ukraine arrives in Washington today to meet President Clinton and members of Congress. There are two general perspectives on the importance of this meeting.

Zbigniew Brzezinski argues in the current issue of Foreign Affairs that the West must create conditions such that Russia can't follow a neo-imperialist course, and that the Russian-Ukrainian border is the best place to draw a line in the sand.

Irving Kristol, on the other hand, concludes that Ukraine's fate is to become ''a client state, or semi-protectorate of Russia.'' Consequently, the United States should follow President Bush's advice, which he presented in August 1991 to the Ukrainian parliament in his ''Chicken Kiev speech'' that sang the virtues of a Russian-Ukrainian union.

Mr. Kristol (and to a large extent President Clinton and Strobe Talbott) is wrong, and Mr. Brzezinski is right, though he comes up short on what should be done. To ''help'' Ukraine, he proposes to pump in more foreign aid.

Alas, close scrutiny of the performance of countries that are large aid recipients shows that aid is inimical to fostering a strong market economy. The two largest recipients of U.S. aid, Israel and Egypt, remain mired in socialism and unable to deliver credible transformation policies. By contrast, the big transformation success story, China (so far), generated fabulous growth from the first day it started to transform its economy in 1978; aid to China was negligible.

If the U.S. accepts the Brzezinski argument and decides to bolster the fortunes of an independent Ukraine, President Clinton must turn a blind eye to Mr. Kravchuk's request for a $300 million bridge loan from the U.S., Kiev's application for a $700 million loan from the International Monetary Fund and a $400 million World Bank loan for sectoral reforms.

DTC What then can President Clinton do to assist Ukraine?

First, President Clinton must discard romantic notions about Russia's intentions vis-a-vis Ukraine and consult some of the works of the great Austrian economist, Ludwig von Mises. In ''Liberalism,'' first published in German in 1927, von Mises con- cludes that ''Ever since Russia was first in a position to exercise influence on European politics, it has continually behaved like a robber who lies in wait for the moment when he can pounce upon his victim and plunder him of his possessions.''

With regard to Ukraine (and the other republics of the former Soviet Union), Russia is confirming von Mises' thesis. For exam

ple, in March of 1993, well before Vladimir Zhirinovsky was on the scene, officials of President Yeltsin's government told leaders in Eastern Europe not to bother building large embassies in Kiev because within 18 months they would be downgraded to consular sections.

Ukraine's weak point is easy to determine: its central bank, founded on bad advice from the G-7, the IMF and virtually all Western advisers. Central banks have opened a Pandora's box in all the former Soviet republics because they have not, and cannot, function properly.

In Ukraine, hyperinflation is running at over 100 percent per month, and the Ukrainian currency, the karbovanets, is well on its way to complete destruction. Things are so bad that the battered ruble is sought after in Kiev's black market.

Since the average length of hyperinflations is 13 months and no hyperinflation has lasted more than about two years, we know that Ukraine's days of financial autonomy are numbered. It soon will be ready for the ever-opportunistic Russians' picking. Rotten doors are easier to kick in than solid ones.

That the Russians will make their move when the karbovanets completely collapses is assured; they are masters at that game. In 1939-40, when the Soviets occupied eastern Poland, Estonia, Latvia, Lithuania and Bessarabia, they encouraged the local governments to inflate (destroy) their local currencies. That left the door open for the Soviets to offer the ruble as a ''superior'' currency. Annexation followed. The same tactic was used most recently (January 1994) in Belarus.

The only way Ukraine can shore up its defenses and protect its sovereignty is to abolish its central bank and replace it with a currency board. By producing a fully-backed, convertible currency, the currency-board system is foolproof. Indeed, no currency board has ever failed, even during civil wars.

Estonia realized this and introduced a form of currency-board system in June 1992. Not surprisingly, the kroon is stable and the Estonian economy is registering solid growth. Lithuania, wishing to insulate itself from predatory tactics, is moving rapidly toward the establishment of a currency board.

If Ukraine wants to remain independent, it, too, must follow suit.

Steve H. Hanke is a professor of applied economics at the Johns Hopkins University and state counselor on monetary and financial issues for the Republic of Lithuania.

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