By Paul Clyde*
As the world watches in horror at the war in Ukraine, and the specter of a devastated Ukrainian economy and infrastructure lurks in the shadows, there is nevertheless good news still to be found. And it starts with free peoples and free markets.
Thirty years ago, the world was in a transition that felt almost euphoric. The Soviet Union had been disbanded and communism in much of the rest of the world was in retreat. Liberal democracies were ascendant, and the prospects for both peace and strong economic development seemed very likely. The war in Ukraine, as well as evidence of lackluster economic performance in that country over the past 30 years, suggests that those prospects did not materialize for Ukrainians. Real per capita GDP in Ukraine decreased slightly since 1991.* And even if the Ukrainian military and people were ultimately to prevail in their heroic fight against the Russian invaders, much of the country’s physical capital and infrastructure will have been destroyed. The Russian economy has fared little better since the demise of the Soviet Union, with its per capita GDP having grown by a modest 30% since 1991. And while some of the Russian population is protesting the current war, a poll taken just before the Russian invasion found that fully 50% of the Russian population thought it would be appropriate for Putin to use the Russian military to stop Ukraine from joining NATO.
At least one among us saw this danger. In a 1992 speech given on the transition of the economies, the late William Davidson, a philanthropist and successful businessman in the western countries who had also begun to operate in the Soviet bloc in the 1980s, presciently stated: “What we do today—by act or omission—will shape the world for generations to come. At no other time has the necessity of success and the consequence of failure been so great.” Ukraine is a consequence of our collective failure.
However, it would be overly harsh, and in important respects inaccurate, to proclaim the economic story of developing countries over the past 30 years a failure. Globally, real per capita GDP has increased more than 55%. In Central Europe and the Baltic states, an area that includes countries neighboring Ukraine and Russia, real per capita income has grown 150%. And these improvements are not driven only by increases in the income levels of the wealthy. Globally, the percentage of the population living in the lowest income level (as tracked by the World Bank) dropped by about 75% between 1991 and the start of the pandemic (the most recent year for which data are available). China and India are often credited for the bulk of these positive developments, but the story of economic success is not limited to them. During the same period, percentage of people living in the lowest income level dropped by 75% in Latin America and the Caribbean as well. In sub-Saharan Africa, it dropped by about 30%. These numbers indicate staggering improvements at multiple income levels and in many regions of the world.
The Emerging Private Sector
What explains these unparalleled improvements? In critical respects, private-sector development played a central role. In India, market reforms put in place by Prime Minister P.V. Narasimha Rao and his finance minister, Manmohan Singh, beginning in 1991 brought India back from the “brink of collapse” and led to an unprecedented creation of jobs, increase in income, and evolution of some of the leading corporations in the world. In the early ’90s, the former Soviet bloc countries began a transition of their major industrial sectors from the state to the private sector. The United States provided support to these governments throughout the transition, not so much through massive spending on foreign aid but instead with ongoing advice in areas such as competition policy, securities policy, and energy regulation. China famously shifted to a far greater role for its private sector beginning in 1992, when Deng Xiaoping was giving a series of speeches encouraging continued economic liberalization. “Socialism with Chinese characteristics” amounted to what was in large part an abandonment of central government control over the economy and greater reliance on private initiative and free enterprise. The results were profound.
In Ukraine, the role of the private sector has been quite different than in the neighboring Visegrád Group countries: Poland, Czech Republic, Slovakia, and Hungary. According to the World Bank’s GovData360, the percent of the labor force employed in the public sector in Ukraine and Russia, as measured in the most recent years for which there are data, was around 40%. The Visegrád countries are much closer to the world median of 20%. A difference also shows up in the Heritage Foundation’s Index of Economic Freedom. In 2020, Ukraine scored 55 and Russia 61, up from 46 and 50, respectively, in 2010 but still significantly below that for the Visegrád countries, whose ratings range from 66 to 75 (up from 63 to 70 in 2010). While real GDP per capita remained constant in Ukraine from 1991 to 2020, it increased anywhere from 85% to 200% in the Visegrád countries. Even within Ukraine there is a difference between the eastern Ukraine and the western Ukraine, where the transition from the inefficient factories and mining to smaller more entrepreneurial enterprises is more advanced.
Political Stability and Economic Freedom
The war today in Ukraine is only the most prominent example of hostilities in other parts of the world. Conflicts continue in Ethiopia, South Sudan, Afghanistan, and Syria. But while the wars in Ukraine and elsewhere are indicative of a failure of our progress over the past 30 years, there are also many countries and entire regions where peace and economic development have thrived. These success stories suggest that an unleashing of the private sectors holds considerable promise for fostering political stability and economic growth. The irony is that in the U.S. and many of the other developed countries, the system (free market) and the sector (private rather than public) have fallen out of favor even as the world has benefited so greatly from their adoption and success.
These successful systems and sectors are not the so-called social enterprises or nonprofits that so many of today’s business schools favor. Despite the name, social enterprises are generally significantly less beneficial to society than traditional profit-seeking firms. Social enterprises will often explain their inability to stand up to the rigors of the market by claiming that their lack of profitability is a result of pursuing other, noble but more subjective goals. Profit-seeking firms, by contrast, must satisfy customers and treat employees well enough to keep them. This leads to a virtuous cycle. Those that don’t satisfy customers or employees will fail. Those that do satisfy customers, employees, and other suppliers will profit, literally, and those profits can then feed the growth that leads to more jobs, more goods, more services, and more investment. The need for jobs and growth is only going to become more acute in the coming years, especially in Africa, where the population is expected to double by 2050. There is considerable evidence that economic growth accompanies profit-seeking firms in a capitalist system, while the absence of capitalism—whether it is government control or social enterprise—has no such track record of success and there is no reason to expect it to outperform profit-seeking firms operating in a free market.
The resistance of the government and people in Ukraine and my own personal interactions with colleagues in business education there over the past 20 years suggests that Ukraine has made significant progress even if it doesn’t show in some important measures. The opportunities in its future, if it is allowed to engage in a free marketplace, are extremely promising. The growth of the neighboring countries gives Ukrainian businesses trading partners that were not available to them 20 and 30 years ago. It is for us in the business and development communities to learn from both the successes and failures of the past 30 years. We must redouble our efforts in Ukraine and around the world to increase the opportunities for people and businesses by engaging with them as viable partners in mutually beneficial relationships. The consequences of failure have become painfully obvious.
*For confirmation of figures regarding GDP per capita, see the World Bank DataBank: World Development Indications: https://databank.worldbank.org/reports.aspx?source=2&series=NY.GDP.MKTP.KD.ZG&country=SSF
*About the author: Paul Clyde is president of the William Davidson Institute at the University of Michigan, the Tom Lantos Professor of Business Administration and the Movses and Maija Kaldjian Collegiate Lecturer of Business Economic and Public Policy at the Ross School of Business, University of Michigan. He advised multiple central and eastern European governments in the early 1990s, including living in and advising the Czech and Slovak governments on competition policy in 1993. He has worked with faculty in many different business schools in Ukraine since 1999.
Source: This article was published by the Acton Institute