Strategic advisor Miklos: "I don’t know any other country that is so far below its potential"
Strategic advisor Miklos: "I don’t know any other country that is so far below its potential"

Strategic advisor Miklos: "I don’t know any other country that is so far below its potential"

22:12, 07 June 2016
20 min. 1091 Interview

For the past two years, Ukraine has progressed in reforms more than it has over the previous 20 years. However, Ukraine could do more, and a key role here has to be played not only by technocratic ministers but also by the Ukrainian politicians, who should abandon populism, that’s according to a co-chair of the Strategic group of advisors for supporting Ukraine’s reforms Ivan Miklos.

Ukraine is on the right path of reform, but the delay in their implementation can destroy the achieved stability, says Ivan Miklos -- a renowned expert in the field of public administration, who has held the posts of deputy prime minister and finance minister of Slovakia in the late 1990’s and first half of the 2000's. Large-scale reforms implemented when he was in office ensured Slovakia’s major economic growth and EU membership.

In 2014, Miklos was invited to Ukraine as an advisor to Finance Minister Natalie Jaresko and to Minister of Economic Development and Trade Aivaras Abromavicius.

In the midst of a political crisis, a candidate for a prime minister’s post Volodymyr Groysman offered Mr Miklos to become finance minister. However, Ivan Miklos refused because of his reluctance to lose Slovakian citizenship. But then he agreed to become co-chair of the Strategic group of advisors for supporting Ukraine’s reforms. As his deputy Miklos chose a Ukrainian citizen Pavlo Kukhta, who has long worked actively with the Government as an expert from the Reanimation Package of Reforms project.

UNIAN met with Ivan Miklos and his Deputy to find out what reforms Ukraine should implement and why; how populism, corruption and inefficiency of state apparatus hinder the country’s development; and why Ukraine should not be afraid of advice from the International Monetary Fund, even if the Fund moves to proposing an increase of the retirement age.

Miklos: Ukraine for the past two years, Ukraine has progressed in reforms more than in the previous 20 years / Photo from UNIAN

Ivan, you are a successful politician, former Minister of Finance of the Slovak Republic. Why are you promoting Ukrainian reforms now?

Miklos: Firstly, I was invited by Natalie Jaresko and Aivaras Abromavicius as an adviser at the time when they were ministers. Secondly, I have for 26 years implemented reforms in different countries, and before that, I have studied this area, I have done the appropriate research. It means, all my life is about the reforms.

Another reason is I think that Ukraine has huge potential, which is possible to use if reforms are successfully implemented. I don't know any other country that is so far below its potential. And I know what kind of reforms can help because I implemented this kind of reforms in Slovakia. We were in a similar situation in the late 90s, in terms of economic structure, the lack of foreign investors, corruption, and so on.

I also think that the effective reforms can help not only Ukraine but also other countries. Because the economic development and investment is a win-win situation. If Ukraine grows to be economically successful and it becomes integrated into the European Union, it will also help Poland, Slovakia, Hungary and other neighboring countries and Europe as a whole. One of the sources of the growth in Western Europe after 2000 was the integration of Central European countries in the EU. Today, the eastern part of Poland and Slovakia are least developed parts of the EU, so Ukraine’s integration and economic growth will be a strong incentive and an economic factor for the development of their economic growth. There is no contradiction in this regard that the reforms and integration into the European Union will be beneficial not only for Ukrainians but also Poles, Slovaks and others.

Who invited you to lead the newly created group for supporting reforms?

Miklos: Initially, I received an invitation from designated at the time Prime Minister Volodymyr Groysman to be member of the Government. We negotiated, but it did not happen, mainly because of the citizenship problem for me. Had I taken this position, I would have lost my Slovakian citizenship, which was not acceptable for me. After this, Groysman offered me to be his chief economic advisor. At the same time, there was Leszek Balcerowicz who was and is now an advisor to President Petro Poroshenko. We agreed we would create this strategic advisory group for supporting Ukrainian reforms, and we are co-chairmen of this group.

Pavlo Kukhta and Ivan Miklos / Photo from UNIAN

Pavlo, tell me, have you been offered a job at any of the ministries?

Kukhta: There were some offers -- Mr Miklos offered me a position of first deputy finance minister, in the case of his appointment.

Ivan, who decided to include in a group both foreign and Ukrainian experts?

Miklos: That was our common idea, and I think it is a good composition. We have people from Poland and Slovakia who have practical experience in reforms, and Ukraine has a lot of good educated skilled young people like Pavlo. I think this is a natural composition.

Who finances the activities of your group?

Miklos: It is still not covered definitely, but we have promises from the European Union, from EBRD that they will cover the funding, but procedures, of course, they take some time. We are now drafting terms of reference, budget and so on.

That is, during the forming of the budget, the tasks will be put forward before the experts, won’t they?

Miklos: Of course. But it is important that not a hryvnia will be paid from the Ukrainian budget for the operation of our group.

And for what term has the group been created?

Miklos: Preliminary for one year, but the work will be divided into two, three, or four shorter periods.

Many technocrats who came to government after Euro Maidan also said they came for a year. But is it possible to carry out real reforms in such a period of time?

Miklos: Not all of the reforms can. Reform is a neverending process. If we talk about the reforms that Ukraine lacked over the past decades, they cannot be implemented in one year. As I said, the group is created for one year. If it works well and if there is demand from the Ukrainian government, the president and parliament, then, of course, it can work longer. If you prepare such kind of project then you have to set a deadline, also for budgeting.

Both of you have collaborated with the government of Yatsenyuk. Pavlo – as an expert from non-governmental organizations, Ivan - as a ministerial adviser. Now you cooperate even more closely with the Government led by Groysman. Do you see the difference between these two Cabinets?

Miklos: I do not see much difference. In Yatsenyuk government, I can say that Natalie Jaresko and Aivaras Abromavicius were very strong pro-reform ministers. But even if technocrats are appointed at ministerial positions, they are also in a political position. From this point of view, I do not know any successful transition country where the reforms were implemented by a technocratic government. In the Baltic states, Poland, Slovakia, Georgia – in all these countries it was politicians who made reforms happen. Reforms now are much more a political than a technical problem. Technically, we know what to do, but politically it is difficult because reforms are often connected with unpopular measures. It is important to explain to the people why there is a need to fight against populists who in turn try to fight against you and to misuse the hardships, the costs connected with the reforms. From this point of view, the technocrats in government have to also be politicians. They need to communicate and fight for reform, negotiate with the parliament, persuading MPs to vote for the necessary laws. This means to do politics.

I appreciate highly the work of Yatsenyuk’s government. Over the past two years, it has done much more work than it was done 20 plus years before. On the other hand, it was possible and it was necessary to do more. Now we face a lot of challenges, so we will see what Groysman’s government will achieve. Until the first steps are very positive. The energy price deregulation in one step instead of the originally planned two steps is really a big step forward. Also, there are positive prospects from the point of view of the fight against corruption, from the point of view of creating a normal business environment.

Pavlo, do you see the difference between the two Cabinets?

Kukhta: It is really too early to judge. My overall impression: the problem with lagging reforms, corruption and lack of political will are in fact tied with the fact that the governance process is too complicated and ill-organized. The current bureaucratic machine is simply not able to implement the required decisions at within deadlines. In this sense, I look forward to Prime Minister Groysman because, in my opinion, he has skills to organize the work of the whole machine. But we can only make assessments when the work is done.

And why has Arseniy Yatsenyuk failed to upgrade the governance system?

Kukhta: This machine was truly falling apart when he came to the government in 2014. Before the Revolution of Dignity, the state bodies were in terrible condition and simply incompetent. Officials in the ministries could not just come into the office of deputies. Yanukovych’s clan imposed the “right” people on these positions. They were doing their own thing, while at the same time they did not interact with their own staff, who were forced to live their own life. It looked like order, since the system was closed and no one was permitted to get inside but, in fact, there was total chaos and lack of control.

That is, when Yatsenyuk came in, the state machine was out of control. Now the system does not look like a corpse, something is already working. Now we need to adjust it. The problem is largely not in the personalities, not in individual people, and not even in corruption or someone’s will to slow down the process. We see these things, of course, but the main problem is that the State does not work as a single mechanism.

There are two maxims. The first one is that it’s easier for Groysman’s government to carry out reforms because a lot has already been done by Yatsenyuk. And the second one is that for the government led by Groysman it will be more difficult to implement reform because Yatsenyuk did not affect the interests of large groups of influence, while further changes will affect them, which will cause stiff resistance. Which of these views are closer to your opinion?

Miklos: I think both of these are right from my angle. In some areas, such as macroeconomic stabilization, much has been done. The rate was stabilized, external debt restructuring was completed, which was a very complicated issue, then the reduction of the fiscal deficit was partially done... On the other hand, in structural reforms, such as judiciary reform, fighting against corruption, deregulation, something was done and something – not. In judiciary reform and privatization almost nothing has been done. It means we have to restart as soon as possible and to focus our energy. In deregulation – something has been done, but many steps are still ahead. With regard to public procurement, a lot has been done including launching the Prozorro e-procurement system.

The main problem, in my opinion, is how the parliamentary coalition is functioning. There is a problem with the rate of approval and unity within the coalition and in cooperation between Parliament and the Government. This problem also existed at the time of Yatsenyuk’s government. I do not want to blame the Parliament, because this is a very complex phenomenon, but the result is really bad. It is also connected with the political system, with the formal and informal rules in coalition, and with the procedural issues in Parliament. Usually, the countries that were successful in carrying out reforms, parliaments supported almost 100% of the government proposals. Last year, the Ukrainian parliament endorsed only 37-39% of government bills. And this is a real problem because most of the reforms need to be implemented through changes in legislation.

And how can the performance of Parliament be improved?

Miklos: This is a very complex phenomenon. Something can be solved by a better management of Parliament by the Speaker. Some very simple rules can improve the situation. For example, there is a very low presence of coalition MPs at the voting. People are missing, there are not there to vote. In Slovakia, for over 20 years we’ve had the rule that the voting is held on each session day of the parliament at 11:00 and 17:00. The rest of the time there is a discussion, but everyone must come and vote at the designated time.

Another problem is the internal rules of the coalition. For instance, it is necessary to have rules in the coalition agreement, diminishing the risk of discontent. It there is a potential risk that a government proposal will not have sufficient support, then, for example, in Slovakia, there is a procedure when one of the coalition parties announces ahead that it has problems with a certain government-proposed bill, and then a meeting is held, which is called a Coalition Board. There the MPs try to find a solution.

Another rule is that the coalition MPs to do not put forward legislative proposals [regarding changes in key areas of the economy] because they have a Government for this. That is, the coalition MPs may introduce a bill only if they have an approval of the ministry which is responsible for the specified area. This rule may look as non-democratic, but it’s not. This is normal. This is an informal rule that has been created by functioning of the parliament.

We also have a rule that any bills introduced by the MPs must pass an assessment from the Ministry of Finance for the fiscal consequences of this law. If the Ministry determines whether the law will increase budget deficit, then there is a consensus in the coalition that the coalition parties do not support the bill.

These formal and informal rules of the game increase the efficiency of the government and the approval rate of its proposals in parliament. When we first started implementing reforms in Slovakia, it was a really difficult and hectic period. But then our approval rate became almost 100% despite some coalition parties not always being happy with government proposals. The thing is we tried to solve the issues in advance.

Very often we hear ahead of the vote in parliament that the International Monetary Fund requires adoption of certain bills. Many MPs say that the Fund requires raising the tariffs, increasing the retirement age and other steps that are not designed for the benefit of the Ukrainians, instead pushing them to hardship. What is it that the IMF actually requires?

Miklos: If Ukraine does not raise the retirement age, the system will collapse / Photo from UNIAN

Miklos: It’s not true that the IMF is pushing the Ukrainians toward hardship. The people here in Ukraine see hardship not because energy tariffs are deregulated but because they were regulated for 20 years. This is a reason of low economic development, very low energy efficiency that is the reason why you have such a huge corruption. Energy tariffs regulation was the main source of corruption. There were two levels of gas prices – a very low regulated level for the households and the market level which was the source of fortune for the majority of your oligarchs. The oligarchs misuse their power against deregulation because they wanted to continue stealing. This means that while subsidizing the poor, you are also subsidizing the rich. There is not one reason for subsidizing energy tariffs.

This, of course, was the reason for very poor energy efficiency and a very strong energy dependence on Russia. Old energy tariffs are a textbook of anti-Ukrainian policy. Ukraine is in Europe’s top four countries with the richest gas reserves. At the same time, in 2013-2014, you imported 50% of gas from Russia. And the energy efficiency of the Ukrainian economy at the same time was two times lower than that of the Russian economy and ten times lower than the average in OECD countries.

Therefore, the statement that the IMF is pushing the Ukrainians toward hardships, this is not true, this is nonsense. It is what populists are saying. The IMF is pushing you to do something that was necessary to do 25 years ago, and it is more in your interest than in the interest of the IMF. Of course, the IMF wants to return the loan given to Ukraine, but the money will only be returned only if Ukraine is successful.

I don’t get tired of repeating that the necessary preconditions for success are leadership, ownership of reforms and communication. Leadership means the leaders keep implementing reforms despite political difficulty and the risk. Ownership means that the Ukrainian leaders implement reforms not because the IMF is pushing, or the EU, or the financial markets are pushing, but because these reforms are necessary, important and inevitable for the Ukrainians.

A good example of the lack of ownership is Greece. The Greek authorities carried out reforms only because of the pressure from the Eurozone, the IMF, that is why the people didn’t want these reforms, they did not understand them.

Ownership means you are doing more than the IMF is pushing you to do. In Slovakia, when we did reforms in 2002-2003, we’ve implemented much more reforms than the IMF asked us. Sometimes Fund told us: "Don’t do it, it's too risky!" But we did it, and it worked.

Many MPs argue that the IMF needs to raise the retirement age for Ukrainians. Deputy Prime Minister Pavlo Rozenko in an interview with UNIAN said that tough negotiations are underway with the Fund to try to change this. What will happen with the pension reform?

Miklos: From a technical point of view, the IMF is correct in terms of raising the retirement age. If Ukraine does not raise the retirement age, the system will collapse. You do not have to do it right now, but in the medium and long term perspective, this step is necessary. This is not only a technical problem but also a political problem. It is normal when politicians say they will not do it now, because at the moment they are doing a lot of other difficult things. As far as I know, the Government proposes that other steps in the same direction, instead of raising the retirement age. For example, to abolish early retirement for certain professions. This is the normal process of negotiations. You can achieve the result of the sustainability of the pension system by different methods.

Kukhta: It's all because of the populists. After all, they operate at the level of some myths. They come out and say that the IMF demands to raise the retirement age. They are trying to raise their rating, stating that they would never allow for such thing to happen, had they been in power.

In fact, the Fund does not require this particular step. We can narrow down the list of jobs eligible for early retirement. For example, we have the prosecutors who have the right to retire at 40. Is this a right thing? I think if you ask ordinary people, they would agree that being a prosecutor is a usual office work, so they should retire just as everyone else. Would it be really an unpopular reform? Given the attitude of the people to the prosecutors, it would rather be a pretty popular reform instead. The same can be said of the special pensions, and so on. First we need to remove from the pension system a bunch of privileges, which provide for the actual average retirement age in Ukraine being much lower than 60 years. But populists say nothing about it, just talking about raising the retirement age for the regular people. They simply frighten people.

In fact, we haven’t implemented any unpopular reforms. Yes, we did raise utility tariffs, but we also provided subsidies. Today, anyone can get it, even those who have quite a decent income. This reform is unpopular only for the owners of palaces in uptown Kyiv district of Koncha Zaspa and such. They definitely can’t receive subsidies.

The main part of the IMF package of requirements regards combating corruption, improving the monitoring of budget expenditures – for example, the introduction of a Prozorro e-procurement system. There are no unpopular reforms. There are reforms that would be pretty popular in our country even without the IMF.

One of the important directions in promotion of reforms in Ukraine is macroeconomic stabilization. What is it about?

Miklos: Macroeconomic stabilization means the continuity of the decrease in fiscal deficit, stabilization of the banking sector, liberalization of the foreign currency market, which is still administratively regulated. Also, it’s about stabilization of inflation which means reduction of inflation and stabilization of the hryvnia rate.

The problem is that although much has been achieved, the situation remains very fragile. If the reform stops, the stability can be destroyed. If macroeconomic stabilization is strengthened and structural reforms are done as well as the institutional reforms, then the economic growth will come. Today Ukraine's GDP growth is moderate: 1-1.5% per year, but what we need and what is possible to achieve is 6-7%.

Kuchta: Thank God the NBU is independent from the government / Photo from UNIAN

Kukhta: I want to clarify that the stabilization of the banking system, liberalization of the currency market and stabilization of the hryvnia exchange rate are in the range of responsibilities of the National Bank, which is independent of the Government. And thank God it is, for when it depends on the Government, it simply prints the money for its needs. Ukraine has already “been there done that...”

Of course, the Government is now working with the National Bank, for example, on gradually removing restrictions on capital withdrawal. Foreign investors won’t come if they can’t withdraw profits from the country.

But fiscal policy is completely run by the Government, and the main task here is very clear: for the first time in 25 years, the country must live within its means. Everyone wants big salaries, pensions, everyone wants to build something, and steal much more. Most of all, people want to steal. Therefore, public spending is too swollen. At the same time, our budget revenues are limited. Moreover, we want to further limit them by reducing taxes, which are too high at the moment. We have been literally squeezing money out of businesses and citizens, and throwing them into the general budget, of which everyone wants to grab a piece.

Instead, we should live like a normal country where people know how much income they can get and how much more they are willing to borrow on top, creating a bit of a deficit. And this is the exact amount they will spend, not a penny more. Meanwhile, we are planning huge spending, and then we get to think how we are going to finance them: we either print money, or squeeze it out of businesses, or run to our creditors.

We need to ensure that everyone starting from the ministries and finishing with schools live according to the funds that have been allocated from budget. Now it looks like this: the money was given, it was all spent within six months, then they run to higher offices, arrange rallies and demand more money. And, unfortunately, they often they manage to grab more money.

If we want to ensure macroeconomic stability, so that the hryvnia rate didn’t fall dramatically and so that we had no huge inflation, all ministries, schools, hospitals and other institutions must live within their means. If you spend the allocated money within six months, then there will be no salaries paid for the rest of the year. This means, someone is to blame and someone should go to prison for making such a mistake.

Miklos: We call it hard budget constraints. As in the family: each family only has the money it actually earns.

What are the necessary steps to reduce budget expenditures in Ukraine?

Miklos: For example, there is a social system. Overall expenditure on the social system in Ukraine is relatively high as a share of GDP or a share of public expenditures. At the same time, there is huge corruption in this area, a lot of corruption, public money is used inefficiently. Also, there is a situation when people who are not poor receive subsidies. It is necessary to introduce means testing and determine who really is poor and who really dependent on help from the government. Then it will be possible to give much more money to those who are really dependent. You also have plenty of "dead souls," people who don’t exist in reality who are used in corrupt schemes on withdrawal of budget funds. The reform of the social assistance system will make it fairer, more effective, and it will save money.

Such changes are possible in every area. For example, take health care. In Ukraine, there are much more beds in hospitals per capita than in rich countries. This means that you pay money not for the medical treatment for the people, not for the medicine, but for heating and managing the utilities which are not necessary.

For example, one-day surgery. Just like in Slovakia, there is a one-day surgery, and then the patient goes home. You don’t do it much here. People stay in hospital for five days. This costs a lot of money, but this is not necessary. You can save a lot of money if you create an effective first aid, ambulance system.

What I am speaking about now, it’s not from textbooks – we did it in Slovakia, we did it in Baltic countries, in Poland and other countries. We had the same problems that you have now.

We have a problem with both privatization and management of state-owned enterprises, half of which are not functioning. What do you propose to do in this area?

Miklos: Privatization is one of the least reformed areas and a very important one. It is a very sensitive issue. It has created a very bad image. The government must have the courage and will to actually do it. Secondly, it has to be done transparently and openly, to really diminish the risks of corruption. You also need to communicate, to explain to the people that state-owned enterprises are one of the biggest sources of corruption.

We also have to make some legislative changes to reduce the number of enterprises that are not allowed to be privatized. Big companies need to be privatized by standard international tenders. This means that from the beginning, you hire advisers, and they are managing the process, they are fighting on government’s side. They are doing everything possible to achieve the highest possible price and to attract the best possible investor. Without hiring the advisers, there’s a risk that privatization won’t be transparent enough and competitive enough. That’s because public servants usually lack experience. Potential bidders are usually big multinational companies that are hiring the best experts. If on one side there are the world’s best experts and on the other side there is a poorly paid public servant who has no experience in selling assets, then what kind of result can you expect from such negotiations?

It is important to start the sale of state-owned enterprises as soon as possible, because the tenders usually take one and a half years, sometimes two years. If you want a transparent process, you also gave to hire advisers by tenders, which can take four or five months. So if you want to get real result in two years from now, you have to start immediately. Unfortunately, we have already lost two years. Had it started two years ago, now we would have strong investors coming in Ukraine to take these companies, to pay a lot of money and to start managing these companies, to bring investment, restructure these companies, bring in new markets.

We did it in Slovakia. We privatized almost all utility companies. We privatized the railways after restructuring, gas industry, electricity production and distribution. We privatized almost everything in open international tenders. It was one of the strongest incentives for attracting strategic investors, for receiving a lot of money and for restructuring the economy.

The same problem is with the land market. If Ukraine opens the land market, this will be a huge incentive, at least for private owners of land. They will be able to gain a loan from the bank. Now the bank can’t give a loan if it can’t have the land as a guarantee. This will be a huge incentive and stimulus for developing small and medium farming business. You have such a good land and so many hard-working people who are able to work on this land that it can be an unbelievable incentive to liberalize the land market.

The best way of fighting against corruption and of using the unused potential of Ukraine is liberalization, deregulation and privatization. And what are the populists doing? They are opposed to this. And who is profiting from this? Those corrupt oligarchs and politicians who are taking money from state-owned companies and big agricultural entrepreneurs, using the situation that these people cannot do business on their land, they can’t sell their land or put it as a guarantee for a loan. The only way for them is to give it almost free of charge to big agricultural companies.

One of the arguments of opponents of privatization and the launch of the land market is that now it will be bought for next to nothing...

Miklos: Then you’re in a vicious circle. If you don’t do this, there will be no reforms. And if there are no reforms then there will be no progress to make the prices higher so that Ukraine was more attractive to investors. A similar situation was in East Germany when Communism collapsed. Prices of enterprises were too low and the authorities have decided not to sell, but they hired the best managers from West Germany. They tried to develop these companies, to recover and to improve them, and then to privatize them. But the results were not just bad, it was a total failure. It is an illusion and a myth of populists that state management could be better than private. It is good only for oligarchs and crony politicians who profit from the state-owned companies.

If we are speaking about private owners, in my opinion, it is anti-constitutional when the state doesn’t allow them to use their property. If this is my property, then who cares at which price I will sell it? It’s not their business. For example, if I am selling a car, the government can’t just tell me that I can’t do it or that the price is too low.

Another argument that the populists use is that there will be foreigners who will come and buy everything because prices are too low. But what will the foreigners do with this land? Will they take it to Austria or Norway? No, they will invest, because if they buy this land, they do it for profit. How can they have profit? By doing business on it. But doing business means investing, employing people, and so on. Most countries have passed through the free sale of agricultural land, and there were no negative consequences.

And what can be done with the tax reform? Everyone remembers the discontent between Finance Minister Jaresko and the Rada late last year with respect to the vision of the tax system. There were two alternative bill: a liberal parliamentary bill, implying a significant reduction in interest rates, and the government-proposed bil which was less drastic but which was supported by the IMF.

Miklos: The Government project was called fiscal. I have to be very clear. The alternative which was called liberal was not liberal at all. It was irresponsible and stupid. If passed, it would mean a disaster for public finances and a huge fiscal gap. This would mean that all the macroeconomic progress would have been destroyed. There would be a difficult situation in currency rate stabilization, this would mean the end of the program with the IMF. Pushing the unrealistically low rates is not liberalism, it is populism.

Also, there were disagreements regarding simplified taxation. This is necessary to say very openly: if the simplified system is not changed significantly, then you can forget about the normal tax system in Ukraine. This is a huge deformation, a huge loophole, which is offering a legal tax evasion for a significant part of the economy. Those who use it, pay much less taxes than those who pay normal taxes. Then who will pay normal taxes? Businessmen artificially divide their companies to be within the limit so as not to exceed the limits, and then the State has no money. The normal rate is too high. It will be possible to have this normal rate lowered, but only if the simplified taxation is really for small entrepreneurs like “babushkas” on street markets. If the Ukrainian business really wants to have a standard non-distorted level playing field, then it is necessary to accept canceling the simplified system in today’s format.

What do you think about the recent initiatives on de-offshorization?

Miklos: I think there will be changes on a global level, to reduce space for using or misusing the offshore companies, including for illegal activities. On the other hand, demand for offshore services will be decreased significantly if the reforms go on. Why in Ukraine or Russia and other countries the demand for offshore services is higher than in Western countries? Because illegal income is much higher because of the level of corruption… the judiciary system is not working. When there is a lot of illegal money from corruption, people try to find solutions how to deal with this, and then they are using offshore services.

Is it possible to achieve de-shadowing Ukrainian economy by simplifying administration taxes and reducing tax rates?

Miklos: Of course, it is necessary to simplify the tax system, but the rates ... In 2014, public expenditures accounted for 54% of GDP, one of the highest rates in the world. If you have such costs and you reduce tax rates, it will increase the budget deficit, the currency rate will explode, foreign reserves will disappear and there will be a default. This means the tax rates can be reduced only along with the public expenditures.

In Slovakia, we have reduced rates because we carried out serious reforms in a lot of areas – macroeconomic measures and structural reforms. We were named the most reformed country in 2003, and then we reduced rates. If you create conditions for high economic growth, then you can reduce rates and you will still have more money. This is the art of the reforms - if your economy is growing, then you can reduce weight of the public sector not by reducing expenditures but by actually increasing them.

If you do reforms, if you change the functioning of the system of governance, then more money will bring better results for the people. If you give more money to the poorly functioning system, money will be lost. It will be stolen, it will be misused, and people will feel no effect.

If it is important that government spending not overtake economic growth, then how can you explain the government's decision to raise social standards from December 1, 2016, not by 6%, as planned, but by10%?

Miklos: This was connected with the energy tariffs deregulation, which was done twice as fast as it was predicted. This allowed the government to save money, and part of the saved funds are used for the increase of subsidies for the poor.

Improving social standards was a good example of how the Cabinet and the Verkhovna Rada may work together to carry out the necessary changes. How can we establish such work in the future?

Miklos: Cabinet should work more closely with Parliament. But there must be rules to improve the rate of parliamentary approval of government-proposed bills. Previous results were very bad. Now it’s also not very good. The problem is not only on the part of Parliament but also on the part of the Cabinet as well. There is not sufficient communication from the government, the biggest problem is on the part of the Rada. Now the situation could improve as the new prime minister knows the Verkhovna Rada from the other side, he understands how it works. But I fear that the main problem of promoting reform will be linked to the Parliament.

Dmytro Sydorenko (UNIAN)

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