Anti-government protestors in Ukraine. (Photo:Getty)
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Western weakness and indecision has fanned the flames in Ukraine

The West's politicians have emboldened Vladimir Putin with their mistakes and indecision. They need to send a signal he can't ignore.

Western leaders are trying their best to sound tough as they wait to find out if Russia sticks to the Minsk agreement and halts its land grab in eastern Ukraine. President Obama has threatened a “strong reaction” if the ceasefire is breached. Chancellor Merkel says Europe is ready to impose new sanctions. The debate about arming Ukraine rumbles on in Washington. Yet this hardly amounts to a turning point. We have already been through 12 months of ‘red line’ ultimatums, incremental sanctions and penny-packet support for Ukraine. The West is no closer to forcing Vladimir Putin to think again than it was a year ago when he seized Crimea.


This makes a nonsense of the idea, skilfully encouraged by the Kremlin, that its intervention was provoked by Western efforts to lure Ukraine into its camp. The real story of EU and US policy towards Ukraine over the last decade has been one of lethargy and indifference. The much-cited 2008 NATO declaration that Ukraine “will join” was a sop designed to make up for the fact that it had just been denied a Membership Action Plan. The EU Association Agreement that Putin induced President Yanukovych to abandon, triggering the Ukrainian leader’s downfall, was offered as an alternative to membership because the EU had become too weary and self-absorbed to contemplate further enlargement.


A West that really wanted to integrate Ukraine would have seized the opportunity offered by the 2004 Orange Revolution to embrace its Euro-Atlantic aspirations and help it to complete its democratic transition. Instead its leaders were told to go away and turn their country into a fully-fledged democracy without the political guidance and financial support given to other former communist countries as part of the EU accession process. Their failure is widely lamented. But the bigger failure – of Western responsibility – is barely acknowledged.


Western disinterest consigned Ukraine to a state of geopolitical limbo, encouraging Putin to believe that he could claw it back into Russia’s sphere of influence by force. The full implications of this only became apparent after the shooting started and policy makers in Europe and America suddenly realised the scale of his irredentist ambitions. They may not have been willing to say yes to Ukraine’s desire to join Western institutions, but they couldn’t acquiesce in the armed partition of Europe and the return of empire without abandoning the principles on which the post-Cold War security order had been built. This was a war about something far bigger than the future of Ukraine.


Every time the West has fluffed its policy towards Ukraine with half-measures and empty words, the bill for repairing the damage has risen.

The cost of failing to support democratic change with the incentive of EU accession was to drive despairing Ukrainians back into the arms of Viktor Yanukovych. The unwillingness of the EU to match its proposed Association Agreement with a package of financial support for Ukraine allowed Putin to scupper it with a $15bn bribe. Now the West is forced to provide £40bn in loans and guarantees to rescue Ukraine’s economy from the resulting chaos.


The bill will go on rising as long as the West prevaricates, and with potentially more serious consequences. Some see the conflict as a vindication of NATO’s decision to keep Ukraine at arms length; imagine if we had accepted a treaty commitment to defend its border with Russia. Well, we may not have to imagine much longer if success in Ukraine emboldens Putin to try something similar in the Baltic States where we do have a NATO commitment. To behave as if our own security in not at stake in Donetsk and Luhansk is recklessly complacent.


The West should be doing far more to support Ukraine, if for no other reason than self-interest. The immediate priority should be to help its economy. If Russian guns have fallen silent for now, it is partly because Putin’s goal of destabilising Ukraine is currently being achieved by economic means. Some financial aid has already been provided, but there is a risk that Western strategy is repeating the mistakes of the EU’s efforts to deal with the Eurozone crisis of always being a day late and a dollar short. The latest IMF package is already being overtaken as the economic outlook continues to worsen, and Ukraine has seen little enough of the money that has been promised as it is. George Soros is right to argue that a willingness to support Ukraine financially is a key test of Western resolve. Sufficient funds should be provided to get Ukraine’s economy off life support and into recovery.


Another crucial area is energy where Russian leverage has frequently been used to undermine Ukraine’s sovereignty. The government in Kiev has set a target of becoming independent of Russian gas supply by 2017, a goal that could be achieved this year if the EU enforced its own competition rules and forced Gazprom to release unused pipeline capacity in Slovakia to facilitate the reverse flow of gas to Ukraine. Instead, the European Commission brokered a deal last October that forced Ukraine to buy overpriced Russian gas and pay $3bn of disputed debt. This has rewarded Russia and pushed Ukraine to the edge of bankruptcy, increasing the cost of the Western bailout. EU policy should be changed to one of supporting Ukraine’s energy independence in the shortest achievable timescale.


It is also time that the West resolved to bolster Ukraine’s defence with modern military equipment. The UK, along with the US and Russia, gave a solemn commitment to support Ukraine’s territorial integrity when the country gave up its stockpile of Soviet nuclear missiles in 1994. If we are not prepared to make good that commitment with our own forces, the very least we should be prepared to do is to help the Ukrainian armed forces to do it for themselves. The current policy of allowing aggression to succeed in the name of peace is as dishonourable now as it was in the Balkans twenty years ago.


In the face of criticism that his Ukraine policy is failing, President Obama insists that he is playing the long game. But what he likes to call “strategic patience” looks to Putin much more like strategic indecision. He draws even more strength from the EU’s weak and hesitant approach. Western policy will keep failing and the cost will keep rising until European and American leaders send a signal of intent that Russia can’t ignore.

 

David Clark was Robin Cook’s special adviser at the Foreign Office 1997-2001.

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The industrial strategy acknowledges a fundamental truth about growth

It's time for the government to recognise that private businesses need help to thrive. 

When Theresa May created a new Department of Business, Energy and Industrial Strategy after taking office last summer, plenty of eyebrows were raised. Industrial strategy, it was widely remarked, was something attempted by the Labour governments of the 1960s and 70s – and it had dismally failed. British Leyland, Concorde and Delorean were the dead proof that governments were useless at "picking winners" and shouldn’t attempt to. What was the new Prime Minister thinking? 

A few commentators did observe that the concept of industrial strategy had in fact been revived at the end of the Labour government and in the early years of the Coalition. Gordon Brown and Peter Mandelson had successfully revived the motor industry in 2009-10 and initiated a new offshore wind manufacturing sector; Vince Cable and David Willetts had identified key manufacturing growth sectors and established new support systems for innovation. But they also pointed out that this had been largely abandoned by the next Business Minister, Sajid Javid, and was never embraced by David Cameron or George Osborne. 

So what did May mean? We are about to find out, when the government publishes its green paper on industrial strategy today. 

Among economic and business commentators, it has been widely assumed that this will again largely be about government support to manufacturing industry, particularly in the field of research and development. This is after all where the orthodox theory of "market failure" acknowledges that government intervention may be warranted. 

But this expectation is wrong. Under Business secretary Greg Clark, the government is taking a much wider approach. In fact the green paper will start from two far-reaching observations about the British economy.

First, take the UK’s low rate of productivity. This is not primarily a problem of the major firms in our remaining manufacturing industries. It is instead rooted in the small and medium-sized businesses in the service sectors, which employ 84 per cent of the British workforce. These are characterised by systematic under-investment in new technologies. 

Second, this is compounded by the huge disparity in productivity across the UK’s nations and regions. While London has the highest output per head of any region in Western Europe, more than a quarter of the UK’s regions rank among the lowest. Only if productivity is raised everywhere can it be raised in the UK as a whole. And only if productivity is raised, can wages be increased. So this is crucial to any attempt to help those "left behind" or "just about managing". 

The green paper will therefore make it clear, as IPPR has argued, that industrial strategy is not just about galvanising R&D and brand new innovation – though this is certainly important. It is about stimulating the much more widespread adoption of new technologies in all businesses - the service sector too. And it is not just about high-tech companies in the UK’s golden triangle between London, Cambridge and Oxford. It must happen in every region and nation of the country

In other words, the government looks likely to accept a vital truth - that industrial strategy is not a single strand of policy, but an approach to economic policy in general. It involves a fundamental recognition that firms and markets left to their own devices do not necessarily generate the optimum results for society as a whole.

Firms under-invest; they do not always adopt the most efficient technologies; they cannot on their own achieve the benefits of clustering together in regional centres; their investors’ horizons may be too short termist; they need infrastructure, skills, planning and other public policies to be aligned; they need to be encouraged to locate outside the existing growth centres. 

In other words, industrial strategy acknowledges that wealth is co-produced by the private and public sectors working together, and successful economies need both.

The chief theoretician of this understanding in recent years has been the economist Mariana Mazzucato, who has argued that the best way of driving investment in innovation is for government to set "missions" to address major social challenges. Just as the US moonshot programme generated innovation in a wide range of sectors, so modern missions such as decarbonisation, meeting the health and social care needs of an ageing population and the housing shortage can galvanise a new wave today. The government can use both "demand-side" policies (such as energy policy and procurement) and "supply-side" policies (such as in infrastructure and skills) to promote private sector investment.

In Britain industrial strategy has always been thought to be a left of centre economic idea, because it requires an active role for government. The Telegraph and Mail will no doubt tell Mrs May this week that it is all very misguided. But this is not how the rest of the world sees it. The most successful economies – Germany, Japan, South Korea, the Scandinavians – all work on the basis of public-private partnership to maximise productivity and achieve better distributed growth. All of them have higher productivity, and lower regional disparities, than the UK.

Yet there remain real question marks hanging over the government’s approach. Will the Chancellor cough up? A strategy with no money will be stillborn at birth. In particular, will sufficient resources and powers be given to regional institutions to support long-term economic growth outside London? Shifting the geographic pattern of investment will ultimately be the key test of the strategy’s success. 

The Business secretary is known to favour "deals" with industry to deliver the strategy, in the manner of the "devolution deals" with local government he developed in his previous Cabinet role. But will these be properly transparent, as the agreement which kept Nissan in Britain in the autumn was not? Will they simply favour the best business lobbyists, or can they represent a real compact of mutual obligations between public and private sectors?

The government has already acknowledged that it needs to recruit overseas negotiators to do new trade deals. It could usefully employ some outside experts to help with industrial strategy too. A good test of its commitment to strengthening public sector capacity is whether the government continue with its crazy sell-off of the Green Investment Bank

Ultimately, the key question may be whether the strategy will outlast Clark, who is probably the only Heseltinian member of the Cabinet beyond Mrs May who really believes in it. Labour’s Shadow Minister Clive Lewis, who has been talking intelligently about industrial strategy and has recently launched his own consultation, is no doubt already sharpening his critique. 

For the Prime Minister, the rationale for industrial strategy is clear. As it goes through the trauma of Brexit, the British economy will need to be seriously strengthened. We are about to see whether she can deliver it. 

Michael Jacobs is the Director of the IPPR Commission on Economic Justice and co-editor of Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth (Wiley Blackwell 2016).