Lecture 4 TRANSITION FROM PLANNING: THE CASE OF UKRAINE Sergiy Pivnenko, M.A. Economics, SFU - PowerPoint PPT Presentation


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Lecture 4 TRANSITION FROM PLANNING: THE CASE OF UKRAINE Sergiy Pivnenko, M.A. Economics, SFU Introduction to Theory of Transition Definition of Transition ... – PowerPoint PPT presentation

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Title: Lecture 4 TRANSITION FROM PLANNING: THE CASE OF UKRAINE Sergiy Pivnenko, M.A. Economics, SFU

OF UKRAINESergiy Pivnenko, M.A. Economics, SFU
Introduction to Theory of Transition
  • Definition of Transition
  • The process from socialism to capitalism in
    former socialist economies - Gerard Roland
  • A move from central planning to market
  • Large-scale institutional change
  • A complex economic and social change which
  • - laws, rules and norms according to
    which agents interact
  • contract law, bankruptcy law, property
    law, competition law, securities
  • law, and intellectual property law
  • - organizations economic, political,
  • - change from communist party regime to
    representative democracy (is democracy a
    necessary condition for market reforms?)

Central planning economy as a big firm
  • fixed prices, quantity and quality (absence of
  • production and exchange governed by central
    administration (ministries)
  • centralized distribution of resources
  • setting output targets
  • Distortions
  • oversized heavy industry and small service sector
  • coordination failure ? shortages or excess supply
  • poor incentives ? low quality products, no cost
    minimization (soft budget constraints)

Transition Reforms
  • Basic steps
  • Stabilization to create macroeconomic
    environment for markets functioning
  • - fiscal balanced budget (cut
    subsidies, sell and restructure bankrupt
  • - monetary low inflation and
    stable currency create conditions for the price
    system to provide
  • correct signals to
    consumers and producers
  • Liberalization to end the excess demand and
    create working price system
  • - deregulation, end of price
  • - demonopolization, ease of
    entry for new firms and businesses
  • - creating a convertible
    currency followed by opening of domestic
  • economy to foreign trade
  • Mass privatization to correct incentives
  • - a transfer of ownership of
    state assets to the private sector
  • Creation of social safety net to alleviate the
    negative effects of enterprise restructuring
  • introduction of unemployment compensation system
  • effective utilization of government expenditures
    for social needs on pensions, family
    assistance, and health

The debate over gradualism vs. shock therapy
  • Examples
  • Shock therapy Poland, Czech Republic
  • Gradualism Russia and Ukraine (shock without
    therapy), China
  • Argument against shock therapy
  • Institutional transformation is rather
    evolutionary process
  • - cannot privatize overnight
  • - cannot build financial system overnight
  • However, fast stabilization makes possible
    efficient structural reforms
  • High social cost of shock therapy (would it be
    lower under gradualism?)
  • Political argument for shock therapy
  • Jeffrey Sachs Fragile governments facing a deep
    economic crisis are best able to carry out strong
    measures at the beginning of their tenure

Economic Transformation the case of Ukraine
  • Population 47,732,079 (July 2004 est.)
  • Territory 603,700 sq km (slightly larger than
  • Location Eastern Europe
  • Life expectancy at birth male 61.35 years,
    female 72.27 years (2004 est.)
  • GDP per capita at purchasing power parity -
    5,400 (2003 est.)

Ukraine remains the only country in the world
that voluntarily got rid of its entire nuclear
arsenal. Between 1994 and 1996 all nuclear
warheads and their carriers were partly
destroyed, partly transferred to Russia in
exchange for the nuclear plants fuel.
A Lost DecadeUkraine's transition in the 1990s
half-hearted reformsno reform
  • Total decline of about 53 percent of GDP from
    1989 to 1998 (negative value added,
  • The underground economy amounted to 49 percent
    of GDP in 1995 (tax evasion)
  • Privatization of land has been persistently
    blocked by the left wing of the parliament
  • Rudimentary stock market, shareholders rights
    not protected
  • Pervasive corruption (Ukraine ranked 69th out of
    85 countries in 1998 Corruption Perception Index)
  • Lack of liberalization (Ukraine ranked 122nd out
    of 123 countries in 1995 Index of Economic
  • Disorganized financial system (amount of barter
    transactions was estimated about 50 of GDP in

Partial success
  • After a period of hyperinflation in 1991-94
    macroeconomic stability was achieved (government
    stopped uncontrolled monetary emission, balanced
  • In 1996 a new Ukrainian currency (hryvna) with
    fixed exchange rate was introduced.
  • Independence of Central Bank (!). Despite the
    pressure from the Government Central Bank,
    maintained stability of Ukrainian currency
  • Privatization (though slow and inefficient) was
    on the way sale to insiders/outsiders, IPOs,
    small scale privatization

Why gradualism?
  • - Lost momentum!
  • Immediately after collapse of communist rule
    (1991) the leadership of newly independent
    Ukraine was preoccupied with nation building
    which was widely perceived as separate from
    market economic reform. The devastating financial
    crisis (10,155 inflation in 1993) ruined social
    consensus thus making shock therapy politically

What went wrong? A rent-seeking model of
Ukrainian economy (Anders Aslund)
  • Four sectors
  • 1. The government opposes any deregulation that
    would reduce its monopoly power and thus its
    revenues from bribes.
  • 2. Rent-seeking businessmen focus on elementary
    monopoly rents, lobbying for regulations that
    guarantee them. They favor all kinds of
    regulations which apply to others but not to
  • 3. The parliament largely lives for bribes, in
    particular the center that represents the party
    of power, which essentially supports the
    government. Thus, the parliament is largely
    interested in as messy a legislation as possible.
  • 4. The Ukrainian households suffer from
    corruption and a dysfunctional economy. They have
    to work in the underground economy in order to
    sustain minimal living standards. Many blame
    reform, as Ukraine has officially been pursuing
    reform for years.

A rent-seeking model (contd)
  • Anders Aslund
  • Thus, we have found an iron triangle of
    government, businessmen and parliament who all
    favor a maximum of regulation and state
    interference to maximize rent-seeking and
    corruption, while the population is of little
    consequence and partly co-opted and compromised.
    The problem is that this model of
    self-reinforcing rent-seeking looks far too
    stable and it is close to an equilibrium.

A rent-seeking model (concluded)
  • A Vicious Circle Piecemeal reforms have bred
    extraordinary corruption and rent-seeking. A
    small group of very rich people has arisen, and
    they have bought political power with their
    wealth. They are using their fortunes to maintain
    their fortunes by bribing politicians,
    bureaucrats and parliamentarians to introduce new
    regulations that generate more rents.
  • Ukraine appeared stuck in a severe
    under-reform trap.
  • (Anders Aslund, 1999)

Ukraines return to growth in 2000
  • Fastest growing industries
  • food processing and packaging, energy
    generation and transit, telecommunication and
    information technology, construction
  • 6 growth in 2000 (13 growth in industrial
    output, 9 - in agriculture)
  • 9 GDP growth in 2001 (18 - in industrial
    output, 27 - in agriculture)
  • 4.1 GDP growth in 2002
  • 6 GDP growth in 2003
  • In 2004 GDP is set to expand by an amazing 10 to
    12 (mainly export-driven growth, due to high
    metals prices on world markets)
  • Reform leaders
  • prime-minister Victor Yuschenko (former governor
    of Central Bank)
  • vice-prime-minister Yulia Tymoshenko (formerly
    one of the biggest gas traders)

What has worked well
  • substantial progress in establishing fiscal
  • refusal of the central and local governments to
    settle tax obligations in anything other than
  • the increase in cash payments for gas and
    electricity by final consumers from levels around
    10 of payments due in 1999 to levels around 70
    in 2001
  • sources of energy rents (these rents amounted to
    13 of GDP - import at subsidized prices and
    re-export at world prices) were removed in
  • - gas imports
  • - electricity-generating industry
  • - oil imports
  • large scale privatization intensified competition
    for rents
  • lower and simplified taxes pulled entrepreneurs
    out of the shadow economy
  • foreign trade liberalization created a
    competitive pressure that forced large
    enterprises to restructure

Ukraines transition reform today
  • February 2001 president Kuchma dismissed
    Tymoshenko and in April 2001 the pro-president
    parties and communists voted Yuschenko out of
  • 2001-2004 reforms slowed down. Despite of the
    growing GDP living standards have not improved
    (30 of the population remain below poverty
    line). Pervasive corruption and lack of economic
    restructuring threaten the sustainability of
  • January 2005 Victor Yuschenko inaugurated as a
    new President of Ukraine.
  • February 2005 Yulia Timoshenko appointed by the
    President and unanimously approved by the
    Parliament as the Prime Minister of Ukraine
    announced the Government's Action Program
  • dismantling of corruption vertical, create new
    judicial system
  • creation of reliable and transparent business
  • modernization of the power industry, reliance on
    renewable energy sources and energy-saving
  • reducing government intervention, fostering small
    and midsized privately-run businesses
  • taxes must be comprehensible, stable and low
  • core principle the State serves the people, not
    the other way around.
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