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The Ukrainian Transition Experience Adrian Hruszkewycz

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25% of all companies produced military goods ... People lost faith in the currency and reverted to bartering with material goods ... – PowerPoint PPT presentation

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Title: The Ukrainian Transition Experience Adrian Hruszkewycz


1
The Ukrainian Transition ExperienceAdrian
Hruszkewycz
2
Outline
  • Introduction
  • Hyperinflation
  • Privatization
  • Financial Sector Development
  • The Future

3
Introduction
  • Second largest landmass, fourth largest
    population in Europe
  • 50 million people
  • Rich in agricultural and natural resources
  • Technological powerhouse during the Cold War
  • 25 of all companies produced military goods
  • Not yet officially recognized as a market
    economy by the EU or EC

4
General Trends
5
General Trends
6
Hyperinflation
7
Hyperinflation
8
Hyperinflation
  • Causes
  • No infrastructure to collect taxes and to
    determine how much is owed
  • Poor statistics available for estimation of
    government budget
  • Price liberalization
  • Seigniorage
  • Government subsidies to inefficient state-owned
    enterprises
  • 1993 most economically illiterate nation on
    earth

9
Hyperinflation
  • Solutions
  • People lost faith in the currency and reverted to
    bartering with material goods
  • Government forced to stop printing useless money
  • Currency collapsed
  • Followed by new currency and changes in fiscal
    policies in 1996

10
Privatization
  • Proceeded much more slowly than other Eastern
    European countries
  • A result of overindustrialization
  • Ukraine produced 17 of Soviet output
  • Industrial managers formed a strong political
    lobby opposing reform
  • Government paid large, direct subsidies to state
    enterprises
  • Gave little incentive for them to privatize and
    run efficiently
  • Privatization came in three stages

11
Privatization
  • Stage 1 (1992-1994)
  • lease with an option to buy
  • Meant to give employees opportunity to own parts
    of a company
  • Employees leases often funded by strong
    directors who took control of the company in the
    end
  • Companies successfully bought out by employees
    often failed due to a lack of managerial skill

12
Privatization
  • Stage 2 (1995-1998)
  • The Mass Privatization Program
  • All citizens received vouchers to be exchanged
    for shares of companies up for auction
  • 100-500 companies auctioned a month
  • Citizens could not purchase enough shares to own
    a majority of a company and influence the
    managers of their companies
  • Citizens often sold their vouchers to companies
    for immediate cash
  • These companies then competed in the auctions and
    bought themselves

13
Privatization
  • Stage 3 (1999-Present)
  • Privatization of large state-owned enterprises
  • Emphasis has been to find strategic investors to
    raise privatization revenues for the state
  • This has been a slow process and many of the
    largest corporations remain under state control
  • Re-privatization

14
Privatization
15
Privatization
16
Financial Sector Development
  • This remains the critical missing component for
    facilitating economic growth
  • Characteristics of a developed financial sector
  • The government has to respect and guarantee
    property rights
  • Must allocate risk and investment widely and
    efficiently
  • Must develop an infrastructure to collect
    information and counter fraud

17
Financial Sector Development
  • Banking System
  • Accounts for 95 of all financial sector assets
  • Total bank assets are only 20 billion
  • One small European band can have assets
    comparable to those of Ukraines entire banking
    system
  • Access to bank credit limited
  • Vulnerable in terms of capitalization and risk
    management

18
Financial Sector Development
  • Non-Bank Financial Institutions
  • Accounts for 5 of financial sector assets
  • Illiquid stock market with little trading
  • Access to capital beyond banks is limited

19
Financial Sector Development
  • Laws and Enforcement
  • Civil Code and Commercial Code introduced in 2004
  • Regulate differently on the same issues
  • Serious obstacle in gaining market economy status
  • Corrupt law enforcement and judicial system
  • Detrimental to attracting FDI necessary to
    bolster a transition economy

20
Financial Sector Development
21
Financial Sector Development
22
Financial Sector Development
23
The Future
  • Growth will not continue without continued reform
  • Large enterprises still under state control must
    be privatized to increase their efficiency
  • Legislation must be put in place and enforced to
    protect investors to promote FDI and investment
    in stocks
  • The Orange Revolution
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