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10 October, 2019  ▪  Lyubomyr Shavalyuk

Middle ground

Where Ukraine’s middle class is and how it can develop

Why is middle class so important in state-building? There are multiple answers backed by historical experience from different countries and epochs. Summarized, they will lead to the following conclusion: middle class is virtually the only strong layer of society whose interests always match that of State. Why is this so? 

The equivalent of lumpenproletariat hates the State for giving it too little. It blames every trouble on the State and always opposes the order in place. These people make good social environment for coups. The poorer the state, the more lumpen, less stability and slower development it has. Oligarchs are another extreme: they disdain the state for giving them too much. They are interested in preserving the order in place as one that allows them to endlessly redistribute resources to their benefit. Proliferation of oligarchs cultivates social injustice and discourages people who can actually drive development. This stifles the state and conserves it in its embryonic state, holding back its potential. Neither the lumpen, nor the oligarchs can tolerate long-term development of the State. So, they hamper it where they can. 

Middle class is the twin sibling of the state, a mirror of it. The more efforts middle class takes, the more results this brings. The State needs strong middle class to unleash its potential and make it more efficient, stable and dynamic. Middle class needs the State to preserve its position, drain the social swamp of the lumpen, restrain oligarchs and create conditions and opportunities for progress.

Ukraine has been gradually moving from degradation and stagnation towards managed development in the past years. Without cultivated middle class, this path will be extremely thorny and patchy. In order to boost socio-economic power of this layer, Ukraine needs to understand what it is, where to find it and what it needs.

 

Defining middle class 

Middle class is an indistinct category. Developed countries categorize it by the level of income that meets a wide range of material and social needs. This approach works there because life is stable enough to allow referral to middle class based even on the area where the person lives or the brand of the car he or she drives. Income there is closely linked to lifestyle, serving as another accurate indicator of middle class. 

Ukraine is different. A poor country with income levels comparable to much of the third world, its middle class is standardly measured at anywhere between 5 to 15% of the population. At the same time, Ukraine has developed, educated and cultured people, which makes it different from the typical third-world countries. Therefore, nearly half of Ukrainians refer to themselves as middle class, according to sociological surveys. 

A poor country with highly developed population is a paradoxical combination, a rare phenomenon in the context of history. But that is Ukraine’s reality. Decades of economic degradation have led it to where it is now, and it takes a non-standard approach to define middle class in Ukraine in this context. 

Ukraine has many people who are poor, especially by West European standards, but lead a fairly progressive and cultured life. They illustrate the essence of middle class in Ukraine. Income is just an external material reflection of it; values of proactivity and internal stimulus are the actual expression of the essence, creating the respective incentives and pushing these people to act accordingly. 

 

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Maslow’s hierarchy of needs offers a good illustration. Middle class is comprised of the people whose basic physiological and security needs are satisfied. They live for creativity, self-fulfillment, social projects and more. In other words, these people can make ends meet (even if subjectively: some people feel perfectly comfortable physiologically and security-wise while looking poor to others), so they do not invest their energy into survival, focusing on personal, family and social development instead. This is the essence, the core of middle class. In developed countries, it is almost always linked to satisfactory income – jobs there create sufficient opportunities for self-fulfillment, and they pay well. In Ukraine, this happens far less often. As a result, representatives of the middle class in Ukraine, their lifestyle and desire to break out of the routine often surprise.

 

Spotting middle class 

Identifying middle class centers by income levels can be confusing in Ukraine. For example, many in the IT industry fit the traditional description: they earn well and often have market-driven and development-oriented mindset and lifestyle. Mid-level managers in mid-sized and big business often match economic and mindset parameters too, while not all small business owners do. According to the State Statistics Bureau, two thirds of them work in trade. These are mostly people focused on buying cheap and selling expensive. They are obsessed with physiological and security needs, even if pretty satisfied already. 

It is hard to find middle class in civil service. Low salaries are not the only reason for that. Let’s look at state-owned enterprises. According to the Ministry of Economic Development, the average share of state-owned business was 8.9% in Ukraine’s economy accounting for 8.2% by income, 15.2% by assets and 12.0% by the number of staff. This shows that state-owned companies have serious assets while generating little income in a sign of inefficiency. Similarly, the number of staff is disproportionately high, signaling that many employees simply waste their time at work. If they were middle class, they would be motivated to change things, achieve results, bring companies to a higher level with different financial indicators. Unfortunately, employees at state-owned companies do not have such incentives. Low salaries reflect this. 

The same is true for officials. Many of them are passive, lack initiative and have chosen to work for the state because of the stability and privileges it guarantees. They sit in their cubicles trying hard not to move too much. Government institutions convey the spirit of the Soviet Union far more often than an aspiration for self-fulfillment pursued by middle class. Even EU-level salaries will hardly change anything because their mentality has been affected irreversibly. Prosecutors, tax officers, customs officers and law enforcers offer a good illustration. They abuse office to make a lot of money, drive fancy cars and live in luxury mansions. Are they middle class? No. Because their actions and lifestyle do not help anyone develop. Quite the opposite. And they try to preserve this status quo.

It is difficult to come across middle class representatives in oligarch-owned business, even if there are some exceptions. Oligarchs are not used to doing business by competition rules, so they rarely stimulate progress in their own companies, or among their staff. Such companies have no internal social lifts, nor an established system to boost development. They view their assets as a cow they can milk but not feed or raise, and they treat their employees as something close to slaves. This stifles business and the people who work in it, not daring to leave. When oligarchs do try to develop business, they normally end up being clumsy because their mentality and development are mutually exclusive. It is impossible to develop a business based on a non-market, non-competitive and often criminal foundation. According to the National Bank of Ukraine, 17 biggest business groups generated almost UAH 1trln of net revenues in 2017, an eighth of total revenues for all commercial entities in Ukraine, including individual entrepreneurs. This is a serious share, but not a decisive one. The problem is that poor corporate culture in the oligarch-owned business is often a model replicated by smaller companies that could otherwise work on a market basis and create the environment for their employees to become middle class.  

Shaping middle class in Ukraine is important from the socio-historic perspective, too. The Maidan was a manifestation of the middle class, uniting its representative regardless of their income levels. Volunteers, activists, volunteer soldiers born from the revolution are the best of the middle class. These are the people willing to sacrifice their life and health for the higher needs in the Maslow hierarchy. In this context, it is possible to say that middle class has seriously expanded in Ukraine. 

There is a downside to this. Many Ukrainians who were young in the soviet time are mentally unprepared to join the middle class. They survived for most of their life and have grown used to focusing on physiological and security needs. They do so now. This is not linked to the level of income: Yanukovych had a lot more money than any average representative of the middle class. But he never grew to the level of the middle class in terms of his mindset or values. There are millions of such people. Regardless of how much money they have, they would still not be able to live a life of someone from the middle class. This is the outcome of soviet psychological traumas; it is too entrenched to change. 

 

State policy

The State needs strong middle class like plants need water. Therefore, it should cultivate and raise it, take every effort to boost its growth and development. In order to do so, the State needs to ensure a number of things. 

It should boost the growth of income among the population. The only way to accomplish this in a long-term prospect is to increase labor efficiency and productivity thereby creating the necessary conditions. There should be no inflated unjustified minimum salaries or other social standards funded from the central budget.  

        Productivity growth requires proper conditions for business development and elimination of the elements causing inefficiency. In other words, Ukraine needs to conduct reforms. For example, privatization of state-owned companies by private investors with a good reputation can deliver productive jobs. This will increase middle class and decrease the number of people without initiative (they will be laid off). Launching the land market will increase competition for land. This will squeeze out all ineffective producers from the agribusiness and lead to the growth of salaries in the industry. All entrepreneurs that are not focused on developing their business as priority can be taught to conduct their business properly at courses (like the Servant of the People’s MPs have recently gone through a training). Otherwise, tough competitive environment can be created to force them to survive and adjust to the dynamic market situation. The same is true for oligarchs: it is probably impossible to teach them; but placing them in an equal legal playing field with identical rules will cut off their opportunities to convert the scale of their business into state rent. With time their assets will be taken over in parts by the most effective and entrepreneurial, or their successors will be forced to change and adapt. There are many such specific recipes. All it takes is political will to implement them.  

Barriers in business development should be removed to increase productivity. The State creates too many today, from regulatory and bureaucratic to the army of law enforcers, tax officers, judges and prosecutors that often only rip business owners off. In this context, quality reform of the judiciary, the tax system, domestic security agencies and governance are the contributing factors to the shaping of middle class. 

 

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Middle class should be cultivated on mental level. The population should be taught to behave in the same way as middle class behaves in developed countries. This includes the ability to spend high income, as well as to appreciate the money earned and not waste it like many richer Ukrainians often do. This also includes the ability to take initiative, have proactive civic consciousness and responsibility. Middle class reads books, continues self-education throughout all life, complies with rules and laws, is responsible about elections and interested in the state of affairs in the country. It has time for many other things which are not yet part of routine for many Ukrainians. 

The world offers some interesting approaches to middle class building. In his book From Third World to First: The Singapore Story, Lee Kuan Yew wrote that one of his goals in his nation-building efforts was to make sure that every Singaporean family has an own home. This would create a class of established owner-citizens who will care about the country and its future. He introduced interesting schemes using pension funds. This is a good approach to building middle class. Another example is the removal of street kiosks and licensing of taxi drivers – a transformation of employment into civilized form. Singapore did this alongside the creation of effective jobs, so that the street traders and taxi drivers had an alternative place to work. In Kyiv, the efforts to remove kiosks started when the economy was in a deep crisis. Only later did the labor market in Kyiv offer enough jobs for everyone.  

The State has many resources to develop middle class. But it needs wise management to channel these resources into the right direction. Unfortunately, Ukraine has not had such a government in 30 years. As a result, the history of its middle class is a typical example of exciting accomplishments despite everything. 

 

 

Translated by Anna Korbut 

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