“Even with the amount of silradas reduced by two thirds and regiony by half, it will not be possible for regions to create independent and competitive regional policy, without a drastic change in the tax system”

How important it is for Ukraine to reform its self-governance structure, if truly considering a state based on Western European standards of regional self-determination and individualism

Russia’s foreign minister Sergei Lawrow has repeatedly been lobbying for a federalization of the Ukrainian state, as an answer to the recent Crimean and Donbas crisis. The Crimean referendum to be held on March 16, 2016 has not been the essence of transparency and high standards of democratic referenda, as reported by OECD and other international non-governmental institutions. As long as the outcome
of the still ongoing crisis remains unclear, and the international community doesn’t accept Russia’s involvement in the action of the separatists, a lack of efficient self-governance institution is clearly observable. Thus, it is one of the main goals of PM Yatsenyuk’s government to create and redefine the role and structure of Ukranian local administrative structures.

Janukovych’s heritage

Ukrainian local government structures do theoretically exist; superficially they are even similar to those present in Europe. This similarity can be seen in the usual three-level division. The largest local governments are the oblasts – a loose equivalent of Dutch provinces. These administrative regions are divided into reions, and finally subdivided into into urban-type settlements and rural councils or silradas, which represent the smallest administrative subdivision. Another similarity is the fact that each self-governance representative is appointed through a general electoral system.
However, Marcin Swiecicki, a former mayor of Warsaw who gave substantial input into the creation of the Polish self-governance reforms of the early 90’s, states: “The Ukrainian local government system cannot be called a true a self-governance system, seeing as it is not a system but rather a way of ensuring that family members of Ukrainian politicians are not kept jobless.” This common opinion arises in a rather negative way from several distinctive characteristics of local political institutions in Ukraine.

Firstly, none of the self-governing structures possess any kind of executive power without the blessing of the centralised Kiev government. The most important implication of it is a complete lack of financial independence. Local governing structures do not possess any legal competences that would allow them to create budgets. Although no financial decision can be undertaken without Kiev’s supervision, regions are not solely financed from the capital’s budget. As much as 10% of their income comes from various local taxes, such as regionally established real estate and utility taxes. However, these margins seem strongly economically insignificant, especially considering that one obwod is populated by around 10 million people, and that expenses are centrally regulated.

In order to visualise these difficulties, it has to be mentioned that even payments for flowers ordered for the then appointed governor of Odessa, Eduard Hurwic, were made extremely late – that is, 90 days late. The scale of public illiquidity becomes even greater when considering payments for serious regional strategic expenditures, with delays reaching up to a few years.
Another large drawback of the existing system is the lack of a clear division of competences and tasks for each level of self-government. This results in a bureaucratic machine that pursues the same processes and controls, thus allowing local bureaucrats to become local corruption centers. If the duplication of bureaucratic activities seems detrimental for the regional economy, then imagine a situation where those duplications occur in twelve thousand (yes, 12,000!) administrative regions. It all seems to be very much like Ukraine. The duplication of these activities of dubious quality at such a great level leads to a disability for regions to pursue any kind of rational and aligned economic policy.

European reinforcements

The temporary government of Yatsenyuk, along with the recently elected Ukrainian president Petro Poroshenko, appointed vice prime minister Volodymyr Groisman to create a plan of drastic changes in those inefficient regional structures, which they identified as crucial drivers of potential Ukrainian economic and social growth. Groisman, the former mayor of Vinnytsia, likes to talk much about his positive experience with joint regional cross-border economic and scientific projects. Furthermore, he decided to arrange a group of mostly Eastern European self-governance experts, who had experience in reforming local government in the early 90’s in former post-soviet countries. Groisman especially stresses the success of professor Regulski’s local governance reforms, which allowed for a very decentralised and efficient local government system aligned with the Polish central government – without destabilising control from centralised authorities. This group has already been advising self-governance in Serbia, Kazachstan and Montenegro, where it pursued a mostly successful policy of regional decentralization, while keeping an unfederalised unitary state organism.

The local government, fool!

The group has identified the uncountable amount of silradas to be the most urgent issue. It is a priority to start bundling these administrative regions, because only then these institutions, closest to the human being, will be able to pursue effective local government policies without having a collective of contradictory regional policies. Gromads are meant to be divided using objective parameters, such as relative regional wealth, industry advance, and population. The emphasis here is to avoid any cultural division in this already divided country, aiming at reducing the amount of gromads by at least two thirds. This should go together with making national treasuries (e.g. real estates) available for local governments, allowing them to professionalise their services for citizens.

Only after these administrative changes will the Kiev government be able to give up competences and distribute tasks to local governments, where it is believed that local governments will be more efficient than centralised authorities. Examples of such tasks and competences might be education, basic health services, or possibly local moratoriums for land transactions – whereby it has to be stated that the Ukrainian system of moratoriums on land has been identified in IMF’s global report to be one of the most crucial spaces for reforms enabling economic growth. Furthermore, the amount of reions should be reduced by at least half towards a level of 245 administrative regions. However, no bundling of oblasts is expected, as twenty-five of them seem to represent a rational amount similar to European self-governance systems.

Misiage, a member of Groisman’s task group, stated: “Even with the amount of silradas reduced by two thirds and reions by half, it will not be possible for regions to create independent and competitive regional policy, without a drastic change in the tax system”. He believes that only if the regional government is able to redistribute some of their income directly, then the reform will be going in the right direction. Furthermore, he believes that leaving all real estate taxes for local government income might be a good start, whereby he stresses the need to go even further and leave some of the PIT and CIT regionally in a not-so-far future.

A last identified necessary reform is the creation of a wealth redistribution system, which would decrease regional economic inequalities. This move is especially important for Ukraine, which seems to be divided by political and national conflict as never before in its short post-soviet history. Dismantling regional inequalities could be a way to keep the country together.

Creating future value

Several problems are, however, arising. Firstly, the government has to pursue a drastic change of the constitution, whereby it should give local governments legal rights towards some degree of executive power in terms of economic and social regional development. Unfortunately, the Ukrainian parliament, Verkhovna Rada, is still full of members of the pro-Russian Regions Party, whereby it has to be said that the term ‘regions’ in the party’s name seems very ironic. This means that it might be very difficult for the post-Maidan coalition to acquire a constitutional majority, which is necessary for an effective self-governance reform.

Another arising problem is the reduction process of administrative regions. The central government might face various interest groups, which are benefiting from the current inefficient self-governance system, by creating a system of disappearing public spending, whereby the multiplier of Ukrainian government spending is below 0 – meaning a negative effect on the economy as a whole – due to immense levels of corruption and public mismanagement.Yatsenyuk’s government will have a very difficult job in balancing between interest groups and reformation ideas. This is strongly related to the relatively strong moratorium institution for land, a major production factor of the still quite agrarian Ukrainian economy. Those regional interest groups use this to increase their own wealth, while decreasing business confidence and creating inefficient resource allocation.
Last but not least, Ukraine has to find a way of settling its territorial disputes with Russia. Without Russia accepting Ukraine’s pro-reformatic strive, it might be extremely difficult to pursue self-governance reforms.

Starting is the trickiest

The Ukrainian self-governance system has found itself on the edge, as probably did the whole state. It is now in the hands of the Ukrainian’s elites to create efficient local government structures, while trying to balance out various economic interest of stakeholders, for whom the current system is beneficial. This reform cannot, however, stand on its own. Without reducing the vast amounts of corruption, nepotism and other economic and political problems, the effects of reform might not be in accordance with expectation. Moreover, the government needs to find a way of balancing between decentralization and centralization, while not allowing the country to split economically and politically to an even greater extent. The self-governance reforms can be expected to  happen at a greater pace at the silradas level than at the higher administrative levels. For this reason, the government needs to be constantly reminded that the reform has to be pursued as a package of radical changes regarding all administrative regions of the state.

Kiev cannot allow Moscow to use the reform for further destabilisation of oblasts, especially of those lying in between a potential route connecting the Crimean peninsula with Russian mainland. Thus, it must decrease anti-Kiev tensions, which are being directed from Moscow. A relative elasticity with official regional languages might help with that, while keeping the country’s territorial integrality.

Last but not least, it has to be clearly stated that the goals of prime minister Volodymyr Groisman’s task group will be very difficult to achieve. Considering both Ukraine’s short-term and long-term economic and political difficulties, it seems rational to state that the country and its political elites need to redefine self-governance with, paraphrasing Deng Xiaoping, “Ukrainian characteristics”.