Ukraine Transition

By Gary McDonald
by Elena Zinchenko,
by Michael Canale

updownTransition for the Ukraine

By Gary McDonald, May 2000

 

The transition period for the Ukraine has been anything but smooth in the last decade.  There has been a significant decline in GDP and in the quality of life.  Moreover there has been massive inflation and a withdrawal of foreign investment.  Leaving the Ukraine in limbo between capitalism and socialism.

The Ukraine is a connected in economics to the rest of the former Soviet Union.  In 1991 trade with these former states accounted for almost four-fifths of the total trade for the Ukraine[1].  Even though they have been making strides to fined more diverse trading partners they are still heavily reliant on the former Soviet States.  The Ukraine is inevitably affected by a downturn in anyone of these states.  One of the Ukraine’s largest imports was fuel.  Fuel used to be subsidized by the soviet union this led to low investment in fuel efficient capital, which is the cause of the huge inefficiencies in fuel we see today in the Ukraine.  To produce one U.S dollar of GDP it takes the Ukraine ten times as much fuel as it does France, Spain or Austria.[2]  With oil prices now at world level instead of low subsidized level the Ukraine cannot afford such inefficiencies.  Even though they cut back oil and gas imports by 36 percent and 11 percent respectively the Ukraine has had its energy trade deficit increase to 3.4 billion U.S. dollars in 1993.[3]  Do to the hire cost of fuel.  And after Chernobyl main Ukrainians are tentative about using alternative energy sources such as nuclear power. 

The government has also been slow to respond to economic changes.  In a planned economy the government is slow to react to changes they have meetings to discuss what should be done then implement the policy some time later.  In an open market economy if the government wants to react to circumstances, the quicker they can do it the better.  In the Gossnab (the state supply system administration) there was over a million employees by 1991,[4] almost all of them had to do some calculations before a policy could be implemented.  Leading to slow adjustments in policies.  Today a reorganized Gosplan and 65 percent of the Gossnab make up the Ministry of economics.[5]  The Ministry now deals with regulating the economy and see that open market activities are secure.  The government in Ukraine has actually grown in size after the break-up; this is because of the fact that most of the functions that were in Moscow now have to be in the Ukraine.  Before the fall of the Soviet Union the Ukraine had 40 ministries and departments now it has around 70.[6]

The Gross Domestic Product of the Ukraine has been steadily falling since the Break-up.  One of the most profound drops has been in industrial output, which in the first half of 1994 fell by almost 40 percent.[7]  Compared to most other former soviet states the Ukraine is right about in the middle.  But this fall in output has caused a problem with under employment and unemployment, although not reflected in official statistics it is estimated that one-third of the labor force of the Ukraine is on “short-time work, indefinite unpaid leave, or under-employed.”[8]  

Changes in GDP in selected transition economies[9]
1992–1996 (% change from previous year)

1992   19931994  1995   1996
Ukraine –17   –17–23 –11.8 –10.0
Russia  –19 –9 –12.6  –4.0  –6.0
Lithuania –37.7 –30 +1.0 +2.8  +3.6
Estonia–14.2–8.5–2.7+2.9+2.3
Latvia –35  –15+0.6+1.5+2.3
 Moldova  –29   –1.2–31.2  –3.0
Belarus–9.6 –11.6 –12.6–10.1+2.6  

The quality of life in the Ukraine has declined since the break-up, as reflected by the drop in real GDP, from 1989 to 1993 GDP has dropped over 40 percent and real wages fell 50 percent between December 1992 and December 1993.[10] 

   The fall in productivity has caused foreign investors to panic; there has been a significant drop in both domestic and foreign investment.  This has lead to revenue problems for the government, which has started to print money to pay its bills.  Causing massive inflation, also scaring off more investors.  In the early nineties the average annual inflation was over 2,000 percent (1,400 percent in 1992 and 5,000 percent in 1993[11]).  The inflation has come down in more resent years in 1998 the monthly inflation rate was estimated at about six percent.[12]  Tighter monetary policy has caused the drop in inflation, but there is still a significant problem. 

The lack of imports dew to the break up of supply lines and the poor value of the karbovantsi (Ukrainian money) has lead to the immergence of a black market.  The shadow market has been “estimated to account for about 50 percent of GDP.”[13]  Black market activities are leading to less revenue for the government, due to the fact they can’t tax these transactions, which is only worsening the situation.  When ask why the shadow market is allowed to exist one official said, “Because they (officials) are themselves corrupt, and receive payments from individuals to turn a blind eye.”[14]    

The Ukraine has had a difficult time adjusting to a market economy.  The standard of living and output have declined.  A criminal element has risen in the Ukraine to fill in the market holes.  But with new trade routes being opened in the Ukraine and the government trying to tighten monetary polices there has been some improvement.  Also the switch to consumer good instead of heavy industrial goods should open new markets for the Ukraine.  If they can continue to improve, then foreign invest should come back and revamp the economy.  

Bibliography

 OFFICIAL MONTHLY INFLATION

            posted at: http://www.infoukes.com/news/rfe-ukraine/1998/

 M. Ishaq and Paul Hare, Transition to the Market in Post-Communist Ukraine

            Posted at: http://www.hw.ac.uk/ecoWWW/cert/certhp.htm

 F. D. McCarthy, C. Pant, K. Zheng and G. Zanalda, External Shocks and Performance…The Case of Ukrain

Marshall Goldman, U.S.S.R. in Crisis W.W. Norton & Company, inc. 1983

 


[1] External Shocks and Performance…The Case of Ukraine pg 5

[2] External Shocks and Performance…The Case of Ukraine pg 7

[3] External Shocks and Performance…The Case of Ukraine pg 8

[4] Transition to the Market in Post-Communist Ukraine pg 6

[5] Transition to the Market in Post-Communist Ukraine pg 10

[6] Transition to the Market in Post-Communist Ukraine pg  11

[7] External Shocks and Performance…The Case of Ukraine pg 2

[8] External Shocks and Performance…The Case of Ukraine pg 2

[9] Table from Transition to the Market in Post-Communist Ukraine pg 13

[10] External Shocks and Performance…The Case of Ukraine pg 3

[11] External Shocks and Performance…The Case of Ukraine pg 2

[12] http://www.infoukes.com/news/rfe-ukraine/1998/

[13] Transition to the Market in Post-Communist Ukraine pg 15

[14] Transition to the Market in Post-Communist Ukraine pg 15

 

updownCurrent economic situation in the Ukraine.

by Elena Zinchenko, May 2000

Ukraine gained its independence from the Soviet Union on August 24, 1991.  Since then, the country has been aiming at becoming a true democratic society.  Free democratic elections have been established for both the Presidency and the Verkhovna Rada, the parliamentary body of Ukrainian government, to prove the sincere intentions of the Ukrainian reformers.  Since then the economy has been declining steadily.

 The economic decline of Ukraine is slowing now.  The political reforms proposed by the government will further the economic stability of the country.  The economic situation of the state has improved during the past several years.  Industrial production grew by 0.2% during the first six months of 1999, compared to the first six months in 1998.  In the second quarter of 1999, the decline of the GDP slowed to 1.5%, significant change from 4.8% in the first quarter.[1]

  Regarding the foreign economic situation, many factors have contributed to this positive trend.  Stabilization of the financial market – including increasing credibility of the hryvna, higher real money supply, and lower interest rates has encouraged economic activities, especially since loans are more readily available.  The depreciation of the hryvna against currencies of Ukraine’s major trading partners artificially increased the competitiveness of Ukrainian goods, both in the domestic and foreign markets.  World economic recovery, positive trends in the Russian economy as well as the end of the crisis in Southeast Asia have significantly expanded foreign markets for Ukrainian goods.  Due to these factors, especially depreciation of the hryvna, experts expect investment to significantly increase in the future, although the amount of Foreign Direct Investment has decreased between 1998 and 1999.

The re-election of Leonid Kuchma will not radically change the economic strategy internationally or domestically.  Kuchma is intelligent and predictable; he has been forced to deal with the economic situations and has handled them well over the last few years.  Since his election in July 1994, President Kuchma has pushed economic reforms, maintained financial discipline, and tried to remove all remaining controls over prices and foreign trade.  He has tried to bring about change in the budget of the country.  As a result, the current budget deficit is decreasing. 

Ukraine has amassed a large foreign debt.  According to the payment schedule, the Ukrainian government and the National Bank of Ukraine (NBU) must repay $3.2 billion to foreign lenders in 2000.  At the end of July, the NBU’s foreign exchange reserves amounted to only $1.2 billion, which casts doubt on Ukraine’s ability to pay its debts.[2]  Ukraine will attempt to avoid defaulting on payments next year due to the following conditions:
·        Rapid privatization aimed at strategic foreign investors (indicated by the increase of foreign investment);
·        Refinancing of IMF payments and maximum possible financing from the World Bank and the European Union (EU);
·        Restructuring of debts to private lenders;[3]

The government will also implement a tight budget policy and reduce subsidies to Ukrainian private enterprises as much as possible.  The reduction of budget expenditures is another important factor in preventing default.  Government will reduce spending on domestic economic activities.  As a result of this decline, industrial output will fall significantly because unprofitable, inefficient firms in heavy industry will be closed.  This will improve the efficiency and quality of Ukrainian goods.

The current conditions in Ukraine promote low business activity, poor investment even in potentially profitable industries, and layoffs in heavy industry, creating dangerous social tension.  The new government must solve these problems, with a priority on those in agriculture.  Kuchma will continue to work on steady reforms with a focus on improving the economy.

 The economy is expected to stabilize further in the year 2000.  Kuchma and his government have already taken steps to relieve pressures of foreign debt by selling missiles to the Russians.  Loosening of the debt noose will depend on the government taking the following strategic steps:
·        Reinforcing state finances: Not only should budget revenues grow due to a competitive economic growth strategy, but also budget expenditures should decrease after the current budget reforms;
·        Providing foreign currency inflow into Ukraine, via policies for increasing competitiveness of Ukraine’s exports, thus attracting foreign direct investment;

Surplus revenues of local budgets are primarily oriented toward financing public administration, law enforcement, and housing and communal utilities.  As of July 1, 1999, expenses exceed the yearly plan by 100%.  In particular, financing of the mass media is 4.2 times higher than planned, which means that local governments are trying to monopolize information, reducing public control over the media’s activities and knowledge of how funds are being spent.[4]

 At the moment, budget policy in Ukraine remains weak.  In 1999, Ukraine’s consolidated budget revenues will decline due to the defective tax system.  The budget deficit will decrease since government abilities to borrow are now limited.  In 2000, large foreign debt payments will necessitate a reduction of budget expenditures and an increase in budget revenues, which may be obtained from privatization proceeds. In the first half of 1999, Ukraine’s budget revenues amounted to 25.5% of the GDP, compared to 27.8% of the GDP in the same period in 1998,and 25.38% in 1995.[5] 

[1] http://www.rcs.donbass.com/gorod/

[2] http://www.reforms.kiev.ua/

[3] ibid.

[4] http://www.rcs.donbass.com/gorod/

[5] Kuzio T. State and Institution Building in Ukraine (New York, 1999), P.185.

BIBLIOGRAPHY:

Kelly D. Politics in Russia and the Successor States (Montreal, 1999).

Kuzio T. State and Institution Building in Ukraine (New York, 1999).

Petro N. The Rebirth of Russian Democracy (Cambridge, 1995).

http://www.reforms.kiev.ua/    

http://www.rcs.donbass.com/gorod/   

Transition in the Ukraine

by Michael Canale, April 2001

The Ukraine became independent from the Soviet Union in 1991. The expected result was a quick transition into a democratic, market-oriented society. Everything looked good, the country had a strong economic base in several different sectors. Agriculture and industry could propel the economy into the world scene. The labor force was also well educated. From the outside, it looked like all the key ingredients for a speedy and successful transition were in place. Unfortunately, the Ukraine did not have such a rapid transition from the USSR’s command economy to the market economy of democracy (Norton). The immediate reaction from the Ukrainian economy was one of disaster. “Economic reforms have been slow in coming until recently, however. As a result, inflation at times has approached 100 percent per month, the bureaucracy can be stifling, and business conditions have been difficult. Not surprisingly, many Western companies have hesitated to do business in the Ukraine. (Norton)” The road to success would be a long and slow process, requiring the patience of the Ukrainian people and the world.

According to Professor Grzegorz W. Kolodko, transition to a market economy is a lengthy process comprised of various spheres of economic activities. The belief that a market economy can be transformed by an overnight introduction is wrong, in actuality the overnight transition or “shock introduction” may cause more harm than good. “The complexity of a market economy requires adequate institutional structures and an appropriate behavior, transition can be executed only in a gradual manner, since these are very gradual processes based upon new organizations, new laws, and the changing behavior of various economic entities. (Kolodko)” The failure of the transition in the Ukraine can be blamed on several factors. The slow passing of economic reform sent the economy into a tailspin of inflation and doubt. Businesses were folding because consumers could not afford to purchase goods because of inflation, or were too afraid to spend any of their money. As a result, the west chose to remain at a distance from joining the Ukrainian economy and helping it gain more power. Trade was down, consumption was down, output was falling, and turmoil began to spread. The statistical data backing up the crisis can be found in the Average Annual Rate of GDP growth. In 1990-93 the Annual GDP Growth measured –10.1, in the period 1994-97 it fell to –12.1 (Kolodko). Eight years of GDP decline would be reason enough for serious reform, and soon it would be on its way.

After having made little progress toward economic and political transformation during the years since independence in 1991, Ukraine has now begun the process of serious structural reform, with the strong and coordinated support of multilateral and bilateral donors. The election of Leonid Kuchma would help bring about the change needed for true market oriented reform. He pushed for change in the economic policies so that inflation would fall and consumer confidence would rise again. Thus, attracting outside influences like the west and gaining the support needed to turn the economy around. “International support for Ukraine's reform program has been lined up, including $200 million in U.S. Government assistance, as well as major commitments from the International Monetary Fund (IMF) and the World Bank. U.S. companies like Apple Computer, Ford Motor Company, and Proctor and Gamble--as well as many of their biggest foreign competitors--have already gained important footholds in an economy that has much to offer, once the foundations of a market economy have been laid. (Norton)” The measures taken to bring successful reform to the broken economy of the Ukraine attracted the IMF, United States, and the World Bank. “The IMF has approved a $371 million loan to help implement the first stage of the plan, and a $1.8 billion stand-by loan, the latter following adoption of a very austere government budget by the Ukrainian Parliament. A $500 million rehabilitation loan is being provided by the World Bank. The United States has also showed its support for this reform program by allocating an additional $200 million in assistance during President Kuchma’s visit to the United States in November 1994. (Norton)” The loans showed that the international economic powers had faith in the Ukraine and were willing to help it regain composure. Such large loans could not be given without the promise of a turnaround.

The economic turnaround was not marked only by success. Scandal would soon plague the Kuchma presidency. Georgiy Gongadze, who had been harshly critical of Kuchma and his entourage, vanished in mid-September and friends believe he has been murdered. His decapitated dead body would later be found and an investigation would implicate Kuchma in the affair. Socialist Party leader Olexander Moroz released an audio cassette, which heavily implicated Kuchma and several senior officials who were assumed to have played key roles in the disappearance (CNN). Kuchma has vigorously denied the claims and says the allegations are an attempt to blackmail him. The matter is still under investigation and is the cause of distress among the people of the Ukraine.

The result of failed transition and then economic reform has opened up the Ukraine to the world-trading scene. Multibillion-dollar companies from around the globe have pledged their support for the nation in hopes that profit can be found in the former Soviet Unions breakaway republic. Not only has the corporate side made pledges, but governments like the United States have also pledged hundreds of millions to help the struggling country make it through the transition. So far it has not been an easy road to a market oriented economy. But the new leadership in the Ukraine and the ability to pass reform measures has opened up the possibility for a successful but slow transition to finally be made.

References

 

 

 

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