The government’s plans to launch a mandatory funded pension scheme (the so-called second pillar) has provoked a lot of debate about future of pensions in Ukraine. Over the past quarter century, second pillars were introduced in several of Ukraine’s neighboring countries. Contrary to common belief, such schemes are not immune to politics, as they change and evolve constantly. So, it would be important to ensure a design for the program that can be preserved and perpetuated in Ukraine’s specific economic, social and political context.
Neither of the two types of pension schemes – solidarity and fully funded – is better than the other. In fact, they work best when they complement each other, as each is exposed to different risks. Thus, an effective reform will need to be centered around enabling synergies between the two schemes.
While the funded system is proposed as a risk mitigation strategy for the solidarity system in Ukraine, it also carries important implementation risks. To make Ukraine’s pensioners more secure, the Ukrainian government will need to map out all such risks and address them along the path to launching the new system. From global experience assessed by the World Bank, there are five key principles that should guide the preparatory work.
1. Strong regulatory and fiduciary framework. This is a key precondition for safety of the pension assets. First, no funded system should start without a regulator that is well-equipped and able to effectively enforce all legal provisions. Bill 5865 in Rada introduces a proper regulatory framework and powers of the regulator. This bill should certainly form part of the reform package. Second, it will also be important to establish proper segregation of assets and records between the activities of the existing voluntary plans and the new mandatory scheme. And third, several governance issues pertaining to non-state pension funds (especially the ultimate fiduciary responsibility of their boards, risk management and internal controls) will need to be addressed to have these funds prepared for their new role and be seen by the public as effective and trusted custodians of their pension assets.
2. Sustainable financing. The funded system can be introduced either as a complementary scheme to the current solidarity system or as a substitutional system. The current government proposal is a hybrid: on the benefit side, it is complementary, but on the revenue side, part of the solidarity system contributions is proposed to finance the new funded scheme. Such an approach may limit the effectiveness of the new system fiscally and socially, aggravating the risk of falling benefits in the solidarity system. This may result in no net improvement in the future combined retirement benefits from this reform. Instead, to maximize the impact of the new funded system, it will need to be funded from new contributions, without tapping into the same fiscal space that provides for the wellbeing of current pensioners. Ideally, these new contributions should come from employee wages, so there is personal attachment to the pension account – a signature element of individual responsibility in such programs. Such employee contributions could further be co-financed by the employer and/or by the government, as an incentive to contribute more for retirement.
3. Efficient administration. The mechanism of money and information flows in the new system should be carefully designed and tested, so that the administrative costs of the new system are minimized. No single Hryvna should be lost on its way from employers to an individual account, as it passes through the government machinery of revenue collection. For this, every detail of the process needs to be elaborated and all risks mapped and mitigated. It can be shown that a 1% annual charge on pension assets over someone’s full work career reduces around 20% of their pension benefits by the time of retirement. Therefore, cost reduction is key – and it has been shown that centralizing core administrative functions is an effective cost reduction strategy. Finally, simple provisions need to be introduced for individuals who do not actively choose a fund. This would pave the way to establishing a “default” fund with a life-cycle investment strategy. Importantly, a gradual implementation approach should help minimize various operational risks. So, Ukraine should start with a simple design that can be easily understood by the general public – and add more complex elements to the system over time.
4. Overall pension system design. The new funded scheme will be only a small supplement to the current system. With a 4 percent contribution rate, it will take an individual about 25 years of contributions for the account value to reach their corresponding annual wage in that year in the future. This is a rather insignificant amount, considering that this accumulated amount equivalent to one year’s wage will have to be spread over the remaining life of an individual after retirement. Therefore, better coordination with the solidarity system, especially its system of minimum income guarantees, is required
5. Well-defined role of the state. Explicit legal provisions about what government can and cannot do will put the system on the right track. The state plays several important roles here: ensuring proper regulations and fair competition in service provision; facilitating a “default” fund; providing co-financing from the general budget to stimulate participation; enabling core record-keeping infrastructure and standards of member services; facilitating markets for financial instruments to promote diversification of investments; providing well-coordinated general minimum income guarantees at retirement, through the solidarity system; and so on. So, having a clear implementation plan and well-defined transitional arrangements will be instrumental to the success of this reform.
A lot of work needs to be done to ensure that Ukraine’s future pensioners have an adequate pension that will allow them a dignified retirement. Therefore, learning from the successes and mistakes of other countries, the government should target a realistic timeline to build the second pillar – with well-coordinated preparatory work yielding a consensus on key design elements (incorporating all the above principles).
Originally published in UKRINFORM via World Bank
Rebuilding of Karabakh: Results of 2021
The restoration work in Karabakh entered the active phase in 2021 as several projects had been completed and the foundations for new ones were laid down. The restoration process in Karabakh started right after the November 10th declaration that ended the 44-Day War between Armenia and Azerbaijan. After the war, Azerbaijan liberated its territories that constituted about 20% of the total territory of Azerbaijan and were occupied by Armenian forces in the early 90s.
During the occupation, about thirty years, Karabakh was subject to ruthless destruction and looting by the occupants. As a result, most of the social infrastructure, including residential buildings, schools, and hospitals, were totally destroyed, and most parts of the occupied territories were left empty. Despite the fact that the total destruction in Karabakh makes the restoration process complex and time-consuming, Azerbaijan immediately started the restoration process. For this purpose, the plan for socio-economic development of the liberated territories was prepared, and for the implementation of this plan, “Coordination Headquarters” and 17 working groups on different areas were established. In 2021, $2.2 billion was allocated from the state budget for the restoration process. The same amount of funds is planned to be directed to the restoration process in 2022 as well. The allocation of the necessary financial resources and the establishment of the state bodies for the efficient organization of the recovery process led to the rapid implementation of projects in 2021.
The most notable project that was almost completed in 2021 was the Fuzuli International Airport. The inauguration of the airport took place in Azerbaijan’s liberated city of Fuzuli in Karabakh on October 26. It was the first airport built by Azerbaijan in the liberated areas, and its construction took only eight months. It was built in accordance with the highest international standards, which enables it to accommodate any type of aircraft. A runway with a length of 3000 meters and a width of 60 meters has been put into operation at the airport. The first test flight to Fuzuli International Airport was performed on September 5, 2021, when the largest passenger aircraft of Azerbaijan Airlines, named Karabakh, landed at the airport. Because of its location, the new airport is considered as an “air gate of Karabakh”. Along with Fuzuli airport, the foundations of the other two airports in Lachin and Zangilan districts were also laid down in 2021.
The year 2021 was also marked by the establishment of the Horadiz-Jabrayil-Zangilan-Agband highway. The foundation of this road was laid on October 26, with the participation of the leaders of Azerbaijan and Turkey. With a length of 124 km, it is part of the Zangezur Corridor, the establishment of which was envisioned in the November 10 declaration. The Zangezur Corridor is a very important project that is going to change the transportation architecture of the South Caucasus and its neighborhood. Its proximity to the Karabakh and connection to the main roads in the region will accelerate the restoration and development of the Karabakh.
Within the framework of the restoration process, another important event in 2021 was the foundation of the first “smart village” in Agali village in the Zangilan district on April 26. As of October, the construction work on more than 110 hectares in Agali village was underway. It includes the construction of 200 ecological houses, 4 non-residential buildings, a smart school for about 360 students, and a kindergarten for 60 children. Work on establishing smart agricultural infrastructure on approximately 600 hectares of land is also ongoing. According to the restoration program, it is planned to re-establish cities and villages in the liberated territories based on the “smart city” and “smart village” concepts. Thus, after the Agali village, this concept will be implemented in other areas of Karabakh.
In 2021, the highway that connects the Fuzuli and Shusha cities was also opened. As this highway passes through the territory that was used to liberate Shusha city, it has a symbolic meaning for Azerbaijan, and therefore it is named “The Road to Victory.” The Fuzuli-Shusha highway is part of the Ahmadbeyli-Fuzuli-Shusha highway, one of the main highways in Karabakh. It is 101.5 km in length and reduces the distance from the capital Baku to Shusha to about 363 km. The foundation of another important transport project, the Horadiz–Agband railway, was also laid in 2021 and its construction continues. This railway is 100 kilometers long and has strategic importance as it will connect the mainland of Azerbaijan with Nakhchivan, Azerbaijan’s landlocked exclave, through the Zangezur corridor.
Along with the mentioned roads, the opening ceremony of the 28-kilometer highway that connects the city of Tartar with the villages of Sugovushan and Talish took place in 2021. The length of this road is 28 kilometers, and as planned, the extension of this project will include 22 kilometers of highway from Talish to Naftalan. Construction and planning work on various transportation projects such as the Barda–Aghdam railroad, the Fuzuli-Shusa railway, and the Toganal-Kalbacar highway were also continued.
Comprehensive works in the energy sector were also carried out within the framework of the restoration program, based on the strategy for transforming the liberated territories into “green energy” zones and connecting the energy infrastructure in those territories to Azerbaijan’s general energy system. In 2021, with a total capacity of 20 megawatts, “Gulabird”, “Sugovushan-1” and “Sugovushan-2” small hydroelectric power stations (HPS) were reconstructed and put into operation in the liberated territories. In total, nine digital substations were built in the Karabakh and East Zangezur regions. Simultaneously, in the Aghdam and Jabrail regions, the construction of “Aghdam-1,” “Aghdam-2,” and “Jabrayil” substations as well as the Karabakh Regional Digital Management Center has been completed.
The other important project in the energy sector was the foundation of the Digital Station Management Center in Fuzuli. This project, implemented for the first time in the South Caucasus, allows through automation to reduce the impact of the human factor on the operation of the network, increase reliability and reduce losses during the transmission of electricity. All these projects in the energy sector serve to maintain the energy security in liberated territories and to transform these territories into “green energy” zone.
All the mentioned projects show that Azerbaijan has actively worked for rebuilding Karabakh in 2021. It will enable Azerbaijan to fully integrate the Karabakh economy into the Azerbaijan economy and to use its economic potential in upcoming years. As the liberated territories have great potential in sectors such as agriculture and energy, it will also positively affect the development of the non-oil sector in Azerbaijan. Implementation of all projects that were started in 2021 will not only contribute to the economic development of Azerbaijan, but will also transport Azerbaijan and Karabakh to the transport and economic center of the region.
No borders to struggle against COVİD-19: Solidarity of humanity can help the situation
Just as COVID-19 does not recognize borders, it is necessary to build the struggle against it on the basis of organization, solidarity, mutual assistance, the use of positive experience, and it should not recognize borders.
2021 was a year of continued struggle against the pandemic and of the emergence of new variants of the virus. The South Caucasus also was not away from COVID-19 and its variants. Azerbaijan continued its effective fight against COVID-19, making the most of the lessons of previous years and the opportunities for rapid response. The vaccination campaign, which was conducted as well as in highly developed countries, is a real sign of performance in this sector. During the year Azerbaijan gave humanitarian and financial aid to more than 30 countries in order to fight the pandemic, made a voluntary financial contribution of 10 million US dollars to the World Health Organization and freely donated 150,000 doses of vaccine to four countries.
The newly appointed head of the EU delegation to Azerbaijan, Petr Michako, also stressed the high level of vaccination in Azerbaijan. The capital – Baku is working closely with The European Union in this direction. The European Union and the World Health Organization have supported the fight against COVID-19 in Azerbaijan with the necessary medical equipment. Medical personnel in Azerbaijan have been repeatedly provided with respirators, goggles, transparent masks and overalls for this purpose. All equipment sent for the safety of medical personnel fighting the virus on the front lines was tested for compliance with quality and safety standards. Kestutis Jankauskas, Head of the EU Delegation to Azerbaijan, said that his organization, as a “Team Europe”, is helping to prevent, detect and combat the COVID-19 pandemic. “Healthcare workers are at the forefront of the fight against the COVID-19 pandemic, which increases their risk of contracting the virus,” he said. -They are our heroes and they need protection. “As part of the Team Europe initiative, the EU has launched an individual COVID-19 package with a budget of around € 32 million to support urgent needs and socio-economic recovery.
In 2021, Azerbaijan achieved major progress in combating the pandemic and the global economic crisis and in mutual cooperation. As a chair of the Non-Aligned Movement, Azerbaijan put forward an initiative to establish a UN High-Level Panel on global restoration after COVID-19. The member states of the Non-Aligned Movement took a unanimous decision to extend Azerbaijan’s chairmanship of the movement for another year, until the end of 2023.
Azerbaijan proposed a resolution at the UN Human Rights Council on behalf of the Non-Aligned Movement on equal and universal access to vaccines for all countries and the resolution was passed unanimously in March 2021. This resolution showed Azerbaijan’s stance on the increasing vaccine nationalism in the world and became an international success.
As a result of all measurements now the number of people receiving the second,third and further doses of the vaccine in Azerbaijan has exceeded 40 percent. Azerbaijan is one of the countries in the continent where the number of virus infections is rapidly declining. Azerbaijan is doing its best to observe this trend around the world. Solidarity can help the situation.
2021: the year of political bankruptcy of Lithuanian government
Ramūnas Karbauskis, Lithuanian businessman and politician, Chairman of the Farmers and Greens Union severely criticized Lithuanian authorities’ actions.
The Lithuanian Farmers and Greens Union (Lithuanian: LVŽS) is a green-conservative and agrarian political party in Lithuania. Following the 2020 parliamentary election, the LVŽS has been in opposition to the Šimonytė Cabinet.
Ramūnas Karbauskis did not even try to find softer words to describe on Facebook the results of the past year. He noted that “2021 Lithuanians will remember as the year of bankruptcy of government, the reluctance and inability to speak, which caused and deepened health and illegal migration crises.” According to him, 2021 is marked as “a scaling and segregation of society, demolition of diplomatic roads, cutting not only with one of the biggest economies in the world – China, but even with allies and neighbors.”
He paid attention to the fact, that current negative economic tendencies were the direct results of shortsighted government actions.
To his mind, “2021 will also be remembered as the year of emptying the state budget, gold government purchases, including golden houses for illegal migrants. The government actively pushed the decriminalization of drugs, the measures to promote the trade of alcohol. He also said, that the end of the year was crowned by the Belarusian fertilizer transit scandal, but Foreign Minister Gabrielius Landsbergis and Transport Minister Marius Skuodis responsible for it remained in their posts.
Thus, he is absolutely sure, that overall, this year has only strengthened the impression that “the government is not working for the Nation, not for its benefit.”
Ex-Lithuanian President Valdas Adamkas has also criticized the permission to open a Taiwanese representative office in Vilnius, saying that the conflict with China has led to huge loses. In his words, “that recognition should have, first, been done by the world, the major countries that have influence and their decision should provide results, not a small Lithuania.”
Today, when these loses have become more and more destructive for the Lithuanian economy, Ausrine Armonaite, the Economy and Innovation Minister says that “the European Union should be more united in its response to China’s pressure on Lithuania.” It turned out, that the mistake was made by Lithuania, but the EU for some reason should solve this problem. Once again Lithuanian authorities shift responsibility to others.
It seems as if Lithuanian officials have chosen the way of confrontation not only with China, but with neighbouring Russia and Belarus. Thus, they continue to increase defence budget of the country instead of allocating additional funds to economically fragile spheres. 2021 defence budget initially amounted to 1.028 billion euros. However, the government allocated additional 20.7 million euros during a budgetary review. 2022 defence budget will be increased to 1.298 billion euros.
The government has not learned how to place political accents correctly. Thus, the lack of coordination and common understanding in the ruling circles lead to political mistakes and the loss of the country’s image in the international arena. Lithuania’s behaviour has led to the shaping of ridiculous image as a country that takes on much more powers than it can afford.
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