The Political Economy of Privatization in Ukraine

Abstract

Along with macroeconomic stabilization and liberalization of commercial activity, privatization is a central pillar of transition from post-socialism to a market economy. Privatization transfers inefficient state-owned enterprises to private owners, promoting "hard budget constraints" and economic incentives for managers in place of political incentives. Although privatization is only one step in the process of enterprise restructuring, it is a key element and certainly the one which has received the most attention.

Privatization in Ukraine started slowly. Serious discussion among Ukrainian policymakers about privatization began around 1990, and by 1992 Ukraine adopted its main privatization laws. However several years later, by December 1994, very few enterprises had actually been privatized, mostly on a case-by-case basis.

At the end of 1994, with the support and cajoling of western donors, Ukraine launched a revised mass privatization program. Although this revised program alleviated many of the problems that previously had blocked privatization, the speed of privatization nevertheless did not pick up as much as was expected and needed. By the end of June 1995, less than 200 medium and large enterprises had competed the mass privatization program, out of 8000 enterprises targeted for privatization in 1995.

This paper recounts and analyzes privatization in Ukraine from 1990 to 1995 in light of the lessons learned by East European countries and Russia. Part I of this paper recounts the experience of privatization in Ukraine from the beginning until late 1995. Part II of the paper presents an analysis of privatization in Ukraine, identifying problems and suggesting possible improvements.