TransitionRecession  

Transition in Ukraine

 By Philip Sanchez

After the fall of the Soviet Union, the countries that made up the union took on the task of converting their economies to an open market system. This is a delicate and complicated process that requires the cultivation of an economic infrastructure that did not exist before. The Ukrainian government also had to achieve political stability to encourage the development of these markets. It was predicted that the Ukraine should have made the easiest transition with such a wealth of resources and proliferated industry (Barner-Barry: 197), but things do not always work out as one would think.

With the separation of the Union, the Ukraine met with the task of cultivating a political system that would facilitate the transition of the nation’s economy to an open market system. A stable political regime is necessary to provide an environment in which previously state-subsidized firms could undergo privatization with ample capital investment. With the Ukraine’s independence on December 1, 1991 (Kyn webpage), the government wrestled with the issue of the distribution of power between the parliament and the executive branches of government (Barner-Barry:261). The president at the time, Leonard Kravchuck, and the predominantly Communist parliament proposed a policy of slow economic reform (Barner-Barry:262).

The political scene at the time of independence was tenuous to say the least. After the Soviet Union dissolved, the Ukraine, which had been a major site of military production, became a storage site of sorts for the nuclear weapons that at one time were built for the Soviet Union. This fragile situation was addressed on May 23, 1992 when the Ukraine signed the Lisbon Protocol to Start I (Barner-Barry:332).

 Along with the other signers, the USA, Russia, Belarus, and Kazakhstan, the Ukraine supported the collective effort for nuclear proliferation. The Ukraine, however turned back on its previous opinion, its motivation being its uncertainty regarding the permanency of its independence (Barner-Barry:332). With its unclear stance on nuclear armaments, the Ukraine was risking its being ostracized from the world market. Facing pressure from the United States and Russia, the Ukraine considered a trilateral agreement. This a guarantee of the integrity of the country’s boarders by the US and Russia, and aid to develop nuclear power plants in return for the dismantling of its nuclear weapons. Although the Parliament was undecided on the issue, the Ukraine nonetheless began to disarm and ship its nuclear weapons out of the country (Barner-Barry:334-335).

The Ukrainian economic infrastructure developed with many linkages to the Soviet economy. The Ukraine had developed a dense heavy industrial sector which was reliant on Soviet subsidies of oil and natural gas for fuel (Barner-Barry:262). Now that the Soviet Union and its constituent countries had separated, Russia announced that it would begin charging the Ukraine the market price for oil and gas (Barner-Barry:262). In addition to this complication, the Ukraine had been experiencing a significant depression. Aggregate demand for Ukranian goods was dropping, and firms were failing to find a market for their goods. Output had been steadily dropping since 1991.  Inflation ran rampant at 2500% in 1992. By mid 1993, the inflation rate was growing at a rate of over 50% per month.  Furthermore, the ever-growing budget deficit had become larger than the country’s projected total revenues(Barner-Barry:197). The rate of inflation was causing the value of the national currency to drop drastically against the Russian ruple and the American dollar (Barner-Barry:197).

   This bleak economic forecast hit the Ukrainian people hard. Purchasing power had gone down drastically. The people were becoming more and more poor. As a result, in 1993, a group of coal miners from the Donbas region decided to go on strike. They voiced their great dissatisfaction with the present government and its inability to ease the difficulties met in the conversion of the economy to an open market model. The people demanded higher wages and lower taxes (Barner-Barry:262). Unfortunately, these were concessions that the government was not able to grant with so few inflows of funds. By the end of 1993, the Ukraine had the highest inflation rate of all the former Soviet Union countries (Barner-Barry:263). The general populace doubted whether or not it was wise to declare independence from Russia, and wondered if they should reunite in the interest of aid in solving these problems.

   Elections in 1994 led to a new presidency held by Leonid Kuchma, the country’s former prime minister (Kyn webpage). The Parliament, still containing a majority of Communist politicians, advocated closer relations to Russia to help alleviate the Ukraine’s economic ailments. Kuchma, however promoted an economic policy calling for drastic economic reform. He wanted to free all market constraints and tighten the monetary policy to combat further inflation and currency devaluation (Kyn webpage). He also faced the task of spurring the privatization of the many firms and industries that were still state-subsidized, and consequently were exacerbating state expenditures.

The Ukraine is a country well endowed with a vast reserve of natural resources and human capital. The country already had in place a diversified industry, a dense heavy industry sector, and an enormous agricultural industry. The country definitely has the means to resolve the country’s present economic problems and pull itself out of depression and fiscal uncertainty. In order for this to happen, the people of the Ukraine must be willing to work together toward the same means, and the leaders of the nation must be able to execute an economic recovery policy with a great deal of discipline. If the Ukraine can accomplish political stability, then the health of the economy will follow. These measures will ensure the healthy assimilation of the Ukraine into the open international market.

                    

 

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