Wisdom from Berkeley

Often in short supply (but rarely in doubt), today is an exception, as two young economists--Gérard Roland and Yuriy Gorodnichenko (BA and MA from Kyiv-Mohyla Academy)--evaluate where things stand for Ukraine;

First, the Ukrainian currency Hryvnya should be switched to a float and it should depreciate significantly.

When you begin with advice straight from Milton Friedman, you're off to a good start. More in that vein follows;

The Central bank should provide liquidity. Some form of temporary capital controls and temporary limits on withdraws of deposits appear unavoidable given the current ongoing bank run (deposits fell by a third in the last few weeks and are falling further on a daily basis). Banks should “reopen” after the infusions of capital and liquidity.

....Given the deeply depressed state of the economy, now is not the time to implement deep budget cuts. But fiscal authorities can still lay out a budget plan for a gradual decline in deficits to restore confidence in the long-run solvency of the Ukrainian government. Stricter monitoring of spending to minimize corruption and waste of public functions must be implemented immediately to make the eventual fiscal consolidation less painful and restore confidence.

....Ukraine badly needs immediate breathing space to introduce reforms and relieve the burden imposed by the Yanukovych government. The main risk here is that the absence of primary fiscal surplus makes an immediate fiscal consolidation or monetization of spending unavoidable in case of outright default. But Ukraine had a nearly zero inflation rate for two year. Some inflation could be a stimulating force if it can be kept under control later on. The new provisional government of Ukraine must weigh the costs and benefits of these scenarios. But right now, it should not exclude the option of default if external support is not coming. An external default would then not alienate Ukraine from the international community, despite the short run disorder it might create. 

All well and good, but Vladimir Putin--as this is written--seems to be determined to turn Ukraine, once more, into The Valley of Death (and restore his buddy Yanukovich to power). Which would preclude the advice offered for Ukraine, long term;

These emergency measures will not address the need for fundamental long-term change. Once there is a legitimate government, elected on the basis of a Constitution approved by referendum, fundamental long term reforms can be implemented. These include a fundamental overhaul of government administration to root out corruption, fiscal decentralization to give more power to the regions, regulatory reform to break up monopolies, opening up entry to foreign firms and small private business, and securing a stable supply of energy by exploiting Ukraine’s large reserve of shale gas.

The need to act fast now does not mean one should not also begin in the necessary process of constitutional change. The people of Ukraine demand it. Ukraine had two revolutions in the last ten years. Both expressed people’s discontent with the status quo and aspirations for democracy. It needs to build a consolidated and participatory democracy. There will likely not be a third chance.

Former community organizer Barack Obama has yet to weigh in.