A quarter century of economic reforms in Ukraine: too late, too slow, too little
The aim of this paper is to describe the main developments in the Ukrainian economy since its independence in 1991, focusing on the evolution of output, and the path of economic reforms. The bottom line on that is well known: Ukraine's economy performed very poorly, and its reforms moved quite slowly, lagging behind most of Central Europe and the Baltic, and even behind some FSU (Former Soviet Union) countries. Explaining why it happened, identifying the explanatory, causal factors — is much more difficult and contentious. Indeed, causation here means two dynamics: the relationship between performance and reform pace, and the underlying determinants of the slow reforms. The paper's main effort is to argue and present evidence that the poor economic performance is primarily due to the late and slow start on economic reforms. The paper only points to the explanations for slow reforms and suggest a modeling approach to analyze this econometrically in future work.
The beginning and the end of this story are in fact nicely tied together. From November 2013 onwards, a simple economic factoid played a huge role in the demands of the street. It became widely known that while at the end of the Soviet period Ukraine and Poland had about the same standard of living, by 2013 Poland's GDP was about three times higher. The general public perception was that this was attributable to Ukraine's lagging reforms, its limited integration with the European Union, and its overreliance on Russia both for energy imports and export markets. This paper will show the first causation argument is indeed correct. For those on the streets demanding the resignation of President Yanukovich, democratic freedoms and a move towards the EU, the abovementioned disparity between Ukrainian and Polish GDPs symbolized all that had gone wrong since the independence. The on-the-ground facts about Poland were by then well known to many Ukrainian travelers and part-time workers. Unlike Poland, Ukraine did not witness Big-Bang reforms and did not join EU, which was considered to be the reason for its huge lag in economic performance. This weltanschauung differed markedly from that of earlier generations, which largely accepted the thesis proposed by Ukraine's early leaders like Kravchuk that the economic problems of Ukraine were due to the harm caused by too rapid so-called 'shock therapy' reforms. In fact, in this paper we will show briefly clear evidence to the contrary: that great economic costs and social pain were due to reforms that were too late, too little, and too slow.
So as to prove the hypothesis, the author introduced the following production function: in transition period a sort of production function exists, with the inputs being the policy changes to move the economic regime from socialist central planning to a capitalist market economy, and the outputs being the resulting economic performance, growth of output, diversification to global markets, and improvements in living standards. Prof. Havrylyshyn suggests that although the aims of transformation amongst intellectuals, dissidents, may have been lofty ones of freedoms, democracy, human rights — the mass of the population was most interested in reaching the standards of living and material well-being that existed in the 'West'. Therefore it is essential to include in any assessment of success, measures such as GDP per capita and broader ones like HDI that capture income distribution and concrete material consumption standards.
The rest of the paper is structured as follows. Section 2 will detail the transition 'inputs' using several indicators of progress in market reforms in Ukraine and itspolitical economy. For context, a brief discussion of developments in democracy is added.2 Section 3 describes the actual achievements and performance for economic and social dimensions. Here too some political economy stories are told to flesh out the analysis. Section 4 undertakes a preliminary and indicative quantitative analysis of the causal relation, arguing that the performance lag is to a considerable extent attributable to the long delay in starting reforms, and their subsequent slow progress, never fully catching up to the leaders. Section 5 summarizes the main conclusions and direction of further research.
This paper was presented by Oleh Havrylyshyn during the 135th mBank-CASE Seminar "A quarter century of economic reforms in Ukraine: too late, too slow, too little".
* mBank–CASE Seminar Proceedings are continuation of PBR–CASE and, since 1998, BRE Bank–CASE Seminar Proceedings Series.
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