A Quarter Century of Transition in Ukraine

With the background of transition developments in the region, Ukraine’s path can now be described. Following the production function concept, first the policy inputs are traced, including liberalization, institutional developments and the accompanying process of democratization. Then a review of the main economic results is presented, covering GDP trends, foreign direct investment flows (FDI) and several measures of social wellbeing. In a summary, the principal cause-effect hypothesis is explained: slow reform inputs resulted in Ukraine’s lagging economic performance.

Policy Inputs: Market Liberalization and Institution Building

The basic story of slow reforms is clearly told by Fig. 3.1 , which traces Ukraine’s TPI compared to other countries. It is evident that for three years until 1994, under President Kravchuk, virtually no reforms occurred and Ukraine was second to last, ahead only of Turkmenistan. These numbers confirm the common view of analysts such as Aslund (2009, p. 3) that ‘in the early 1990’s the government ignored economic policy’. Aslund and others point to the disastrous macroeconomic consequences of hyperinflation and a deep recession. But an equally important consequence of delayed reforms was that non-liberalized markets created a great opportunity for rent seeking and the eventual formation of an oligarchy. Chapter 5 argues that the 1994-97 jump in reforms under President Kuchma was too late to prevent the embryonic establishment of future oligarchic powers. Furthermore, while his efforts were real enough through 1998, they were too little to stop this process and far too little to catch up to the leaders in central Europe. While his leap forward was substantial, the leading CEB reformers continued resolutely on their path to a market economy, and by 1998 Ukraine, was still very far behind. From that time on, the reform pace slowed considerably and was clearly too slow to make a big difference any more. Most disappointingly, TPI was nearly flat after the Orange Revolution of 2004, under the supposedly reformist Yushchenko regime. That reforms continued to be limited from 2010

under Yanukovich is, of course, not much of a surprise.[1] Chapter 8 shows reform progress in 2014-15 was achieved, though many experts consider it limited.

It is important to note that Ukraine did at least achieve consistent forward progress and partial catch-up. While in 1993 its TPI score exceeded only the three well-known laggards—Belarus, Turkmenistan and Uzbekistan—by the end of Kuchma’s presidency its score was a much more respectable 3.1—which the EBRD characterizes as a functional market economy, but even so, it exceeded that of only five other countries. In other words, the progress was not enough to close the gap with the majority of transition countries. Some more albeit modest progress in next ten years, plus the fact that some countries, like Kazakhstan, reversed their market achievements, put Ukraine, in 2012, at 3.3, but still well behind the leaders in central Europe and even outpaced by several FSU neighbors: Armenia, Georgia and Kyrgyz Republic. Another small positive in the reform path is that with the limited exception of 1998, the TPI score saw no reversals as in some other countries (Russia had the most), so that progress to market, albeit very slow, was steady, even in the democracy-destroying years of the Yanukovich presidency. Later chapters of this book will look deeper into the type of market economy this was or was not.

Consider, finally, the much-debated issue of the sequencing of liberalization versus institutional development. Many critics of big-bang reforms (Stiglitz 1999; Kolodko 2004) have argued that the Washington Consensus focusing on stabilization and liberalization has been costly to transition countries because it impeded institutional development, which, in turn, led to lower growth. The most recent and thorough counterarguments to this are in Hartwell’s book (2013), which demonstrates that the countries which moved slowest on institutions were not the early liberalizers, the big-bang cases but, rather, the slow reformers, in particular those of the FSU group. This sequencing is clearly seen in Fig. 3.2. CEB countries have been from the early years to the present far ahead of the FSU in both liberalization and institutions. As in Fig. 3.1, we see a big gap opening over time, and again a comparison of just Poland and Ukraine captures the general tendency nicely. The separation of liberalization and institutional development measures brings out a significant fact on Ukraine: already by 2010 its slow but steady reform progress had brought the LIB index (left panel of Fig. 3.2) to a value of nearly 4.0, no longer so far behind leaders like Poland and CEB countries, at about 4.2—4.3. So all is not bad news. Ukraine did eventually reach very high levels of market liberalization, if not quality of institutions. Indeed, starting at second to last within the FSU group in 1994, it rose, by 2013, close to the top of that group, along with only Georgia (thanks to its much more successful Rose Revolution), and nearly forgotten little Moldova.[2]

However, its lag on INST (right panel) remained substantial, reaching barely over a 1.50 value compared to the latter’s values of well over 3.5. Indeed, Ukraine was not that far ahead of the three FSU laggards. The great impediments to an open, competitive environment that this implied, and the related dominance by the oligarchate, are explored in later chapters. This great shortfall on institutional development is also striking given the explanations for delaying liberalization given by early leaders—including Kravchuk in Ukraine, as Chap. 4 elaborates—emphasized the need to put in place good market institutions; they never did this.

The considerable lag of Ukraine on institutions is confirmed by other more specific measures. Thus Fig. 3.5 shows for 2012 that Ukraine had a much worse business climate than most transition countries, with the position of about 165 th among 180 countries. Poland ranked about sixty- fifth, and Georgia, thanks to the success of the Rose Revolution, was at values seen for countries of the Organization for Economic Co-operation and Development (OECD). One consequence of these poor business policies is the high degree of corruption reflected in Fig. 3.6. Other indicators of the quality of governance and ROL, provided by the World Bank but not shown, tell the same story.

Ease of Doing Business 2012

Fig. 3.5 Ease of Doing Business 2012

Degree of Corruption

Fig. 3.6 Degree of Corruption: Rankings 2015 (Source: Transparency International. Note: Ordinal ranking in a sample of 180 countries; higher value means greater corruption)

  • [1] Indeed, if anything, we would provocatively suggest the surprise is that they were not reversed andeven show a very slight uptrend. We leave that to others to investigate.
  • [2] Moldova did not have a colour revolution but is a fascinating, understudied case which slowly butsurely, under a communist party government (Voronin), moved up and up, forward and forward.
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