Economists Erik Reinert and Basil Kalymon Weigh on Whether Free Trade and IMF Policies Are Helping or Hurting Ukraine

L-R: Erik Reinert and Basil Kalymon

Yuri Bilinsky, New Pathway – Ukrainian News.

Globalism and the drive to establish open economies and world trade without frontiers used to dominate the global politics. Then came a backlash with Brexit, Donald Trump was elected US President because of his clear anti-globalist stance and several anti-globalist parties received prominent places in parliaments throughout Europe. What are the real results of the globalist economic policies, and why this U-turn?

Erik Reinert, a Norwegian economist, Senior Research Fellow at the Norwegian Institute of Strategic Studies, says that instead of lifting the less developed economies to the higher levels, the globalist economic and trade policies have maintained the two-tier system where rich and poor countries continuously form two different groups in the economic world. He claims that the policies of the Western countries and such global organizations as the International Monetary Fund and World Bank – in spite of their rhetoric to the contrary – have produced de-industrialization in the third world countries which resembles the infamous post-WW2 Morgenthau Plan to de-industrialize Germany. In 1947, the United States understood that the Morgenthau Plan made it necessary for many Germans to leave their country: an agriculture-based country cannot hold as many people as a country with both agriculture and industry. As ex-president Herbert Hoover famously wrote to President Truman from Germany: “There is the illusion that the new Germany …can be reduced to a’ pastoral state’. It cannot be done unless we exterminate or move 25.000.000 out of it”. Within three months, the Morgenthau Plan was turned to the opposite – to the Marshall Plan re-industrializing Germany. Ukraine nowadays is also facing de-industrialization and the loss of wealth and population, and this must be stopped, says Reinert.

My first question to Erik Reinert was about the cases of China and India which arguably have raised their living standards over the past decades thanks to the global trade and investment.

Yuri Bilinsky: If countries can sort themselves out, they seem to be able to break away from the third world economic standards. So, is it a permanent diagnosis if a country belongs to the third world? Is there any hope for countries like Ukraine in this respect?

Erik Reinert: Both India and China have had conscious strategies giving tariff protection to their national industries since the late 1940s. Just as the US did in the late 19th century, these countries removed the industrial tariffs only when their industries could compete internationally. Ukraine is currently de-industrializing. China and India have made themselves Marshall Plans, Ukraine has been forced into a Morgenthau plan. Symmetrical trade – trade between countries on the same level of development – is always good. But asymmetrical free trade, between rich and poor countries, will not benefit the poor. China has understood this and has been playing the same game that the West used to play. All countries, which have brought themselves out of poverty, starting with England 400 years ago, developed their manufacturing industries. In the 20th century, both capitalist and communist blocks did the same – they were both cultivating their manufacturing industries, although the systems were very different. Even a relatively inefficient manufacturing sector can give the country a higher living standard than an absence of manufacturing. Ukraine had a higher living standard under that stupid communist system than it has now because it is now losing its manufacturing industry.

Yuri Bilinsky: Who is to blame for this, Ukraine itself or the West?

Erik Reinert: I think the ideology, which has been forced upon countries like Ukraine, is at fault here. The policy of EU is partly to blame – the EU has free trade in some agricultural segments with Ukraine, but the quotas are very low. Ukrainian parliamentarians have told me that the annual EU quotas run out in January or February. I understand the eagerness in Ukraine to be close with the EU but I think the Europeans are exploiting the situation and forcing Ukraine to sign things that Ukraine probably shouldn’t have signed. Look at Belarus, it’s a terrible dictatorial system but it has twice the wage levels of Ukraine. Although it is a small market, they have managed to keep their manufacturing industry and there is something to learn from them. Ukraine has a big market, and I think it should try to protect some of its industries like the US which is protecting its aircraft and auto industries. Free trade doesn’t always work, it was the message in my book, How Rich Countries Got Rich and Why Poor Countries Are Poor, which is now translated into Ukrainian. I think, we are on our way out of that triumphalism, which came with the fall of the Berlin wall, that the ‘magic of the market’ will sort everything out – it isn’t that simple.

Yuri Bilinsky: What does Ukraine need now in terms of economic policies?

Erik Reinert: What Ukraine needs is a Marshall Plan, which is to allow Ukraine to rebuild its manufacturing sector. Ukraine needs the same fast turnaround from the Morgenthau Plan to the Marshall Plan as the one happened in Germany, because Ukraine is needed as a buffer between East and West. I don’t understand why the West is treating an important strategic ally like Ukraine in such a bad way. The West understood it with South Korea which was a buffer zone against communism. They allowed the Korean industry cheap capital, extensive protection from free trade for a long time, etc. The EU tends to blame everything on corruption and they are hiding behind that as an excuse. First of all, I think what’s happening in Ukraine is more than corruption, it seems to be outright theft from the public coffers. There is corruption also in Germany, but the country is still rich. If you get rid of corruption, that – per se – will not make you richer. This is of course not a defense of corruption, but the West is using this as an excuse to allow hardly anything in terms of policy. Virtually no one has read the more than 1,000 page Ukrainian treaty with the EU. This treaty gave far too many concessions to the EU.

Yuri Bilinsky: But the European representatives are saying that no Marshall Plan will work in Ukraine until it gets rid of corruption and excessive regulations.

Erik Reinert: The main problem is the lack of market, the lack of purchasing power. This vicious circle has to be broken and the way it can be broken is to do something like the Marshall Plan, and the Plan meant getting rid of free trade for a while. In my country – Norway – it was prohibited to import clothing until 1956, 11 years after WWII. And you couldn’t import private cars until 1960.

Yuri Bilinsky: What do you think the IMF has been doing wrong to Ukraine since they started financing the country in the 1990s?

Erik Reinert: They said “don’t worry about the trade deficit – we will lend you money”. And they lend you money and you end up in a debt trap. An important factor in bringing nazis to power in Germany in the 1930s was a huge debt, the Germans were saying “we are debt serfs”. What Germany and the EU are now doing with the peripheral countries is exactly what the Germans themselves were complaining about in the 1930s. This debt is becoming unpayable and these countries will end up like Greece, where the banks are eating away at the country’s GDP. The ideal thing for Ukraine is to seek trading partners among its economic peers.

Yuri Bilinsky: Why do you think the IMF has been pursuing this policy “don’t worry about your trade deficit, worry about your inflation”? Is there any ill intent?

Erik Reinert: It’s because the IMF is in the business of lending money, I don’t think there is any conspiracy against Ukraine in particular.

Yuri Bilinsky: After the West and North America in particular lost its manufacturing to Asia, living standards have fallen very drastically here. Why are the living standards falling if the financial sector has been booming and the finance is among the most lucrative industries?

Erik Reinert: In this sense, Ukraine, the US and Canada are in a similar position. De-industrialization is one reason, but also killing of the labor unions which used to keep wages up. This has created a new vicious circle of decreasing demand and decreasing wages. I don’t understand why capitalism would want to reduce the purchasing power of their customers. Partly this is because the financial sector is in the driving seat.

Yuri Bilinsky: Are you a Keynesian?

Erik Reinert: I’m a Keynesian in terms of medicine that he prescribed. But I’m a follower of Schumpeter in the sense of what created the crisis – a stock market boom which bursts and creates a financial crisis. We had a big IT boom in the 1990s which collapsed in 2001 and lead to deregulation which in turn lead to the financial crisis in 2007. In 1999, President Clinton signed the Gramm-Leach-Bliley Act that gave commercial banks the opportunity to participate in speculative financial transactions. That was the beginning of speculation that lead to the crisis. The problems start when politicians start treating the financial industry just like any industry. We shouldn’t have given too much leeway to finance. And that’s actually what happened.

Yuri Bilinsky: Many people in North America are complaining that unions are actually part of the problem because many workers are not members and have no chances to ever become unionized, but they carry inflated costs of everything brought about by unions.

Erik Reinert: Unions are important because by making labour expensive they force businesses to invest in technology. I think unions should be generalized, all the workers should be members of unions. In Norway at building sites which are less than 6 storeys high, they don’t install lifts anymore. They get cheap labor from Poland to carry the building material up. And when I went this year to the Western Ukraine, I heard that many Ukrainians are going to Poland in the summer to work in construction, replacing the Poles that go to Norway. When I went to Moldova, two weeks ago, I heard that workers from Moldova go to Ukraine to replace workers that are going to Poland. This is a race to the bottom in terms of wages: the opposite of what happened after WWII when wages were growing everywhere which created a lot of prosperity. The current race to the bottom is very dangerous.

Basil Kalymon, professor emeritus of finance at the Ivey Business School, London, Ontario, had this to say about free trade and IMF policies in general and as applied to Ukraine:

I do not have much confidence in the concept of protectionism as a way to prosperity. If this were true, the Soviet Union should have become the richest nation in the world. Ukraine is already “industrialized” however its industries are highly inefficient due to past protectionism and present corruption. It is quite obvious that those countries, which have conducted deep reforms and espoused free trade along the lines generally recommended by the IMF, have been successful. Here we have the Central / Eastern European countries as an example which joined the EU free market.

As to Ukraine, the EU offer is the best available and “fairness” is in the mind of the beholder. Ukraine is not running any significant trade deficit and it certainly is not the result of following the IMF policies. In fact, the main source of trade deficit in the past was the low gas price policy which the IMF forced Ukraine to abandon. The debt load of Ukraine is due to budget deficits and gross miss-appropriation of the funds borrowed. I would point out that the IMF is not the principle lender to Ukraine and much of the debt was accumulated in the Yanukovych era through open market borrowings.

As to a “Marshall Plan”, without reform, it would simply add to the accumulation of wealth of the oligarchy. No such plan can be applied before reforms as the common people would not benefit.