In doing this project, two countries, Russia and Ukraine, have been selected. For the past 10 years or so, these two countries have changed profoundly. It is no longer government by a single socialist party that imposes its official ideology on the citizenship. Russian and Ukrainian societies have opened themselves up to the rest of the world and to a new pluralism of views and ways of life. As a former resident of Soviet Union, all of this was unthinkable during the many years of closed Soviet socialism.
The Russian and Ukrainian economies have also changed. They are transforming themselves from a centrally managed to a market economy, but a very peculiar market economy. The economic stagnation that began a bit over a decade ago has become a steep production decline in these two countries. Inequality has also increased, and mass poverty has become a fact of life in Russia as well as in Ukraine. It is surprising that such a decline took place in the countries well endowed with natural resources, a relatively well-educated labor force, and rich industrial and technological traditions. The question to ask is what ought to be done in order to enhance the economical and social standards of these two countries.
In 1992, the Russian Federation embarked on the long and difficult path of transitions toward a market economy. This process has resulted in a profound change in Russian’s economy, even though the transition is far from complete and has often been accompanied by disappointment and setbacks. Nevertheless, recent economic developments are encouraging, and there are firm grounds for sustainable growth and development.
The economic situation appeared to stabilize in 1997 with a substantial reduction in inflation and the signs of positive GDP growth. However the financial crisis of 1998 showed that these developments were not based on a sustainable foundation for economic growth. The principal reason was an unsustainable fiscal and public debt situation combine with continuing structural weakness. These fundamental problems also reflect weak implementation of fiscal and structural reforms, which result from limited involvement of legislative bodies in the design of reforms, and their implementation.
The situation has radically changed in 2000. On December 31, 1999, the sudden resignation of Boris Yeltsin was followed by the appointment of Vladimir Putin as acting president, of the Russian Federation. The new Russian government, formed after the major reorganization of ministries in May-June 2000, has embarked on a course of reforms unparalleled since the initial launch in early 1992. Deregulation and increased transparency of the business environment, comprehensive administrative, judicial and public service reforms, and changing nature of the social welfare.
Despite the generally positive economic developments, the government still faces a number of key challenges in building the foundation for sustainable growth. While in the short-run, the real devaluation of the Ruble has helped engineer a rebound in economic activity, translating this into sustainable economic growth is another major challenge that requires addressing structural issues, most notably the non-payments problem. A related challenge is to improve the investment climate by increasing transparency and addressing corruption and bureaucratic, while at the same time strengthening internal and external economic growth. Challenges are vast and so are the government’s plans. Only time will allow to judge the actual breakthrough the government is able to achieve. This is, in brief, a picture of current economic situation in Russian Federation.
Ukraine re-established its independence in August of 1991, after more than 70 years of Soviet rule. As a nation of almost 50 million people, Ukraine is strategically located between east and west, with a great endowment of human and physical capital. For all the potentials that the country holds, the first decade of independence must be considered one of missed opportunities and great disappointment on the economic and social fronts.
Ukraine has a well-educated, highly skilled labor force. Due to the country’s rich soil, agriculture accounts for a large percentage of GDP. Ukraine was the “bread basket” of the former Soviet Union. According to Ukrainian National Bank report, Ukraine as a republic of former Soviet Union, accounted for the quarter of Soviet grain production, one fifth of its meat and dairy output, and more than one half of its sugar and beef production. Moreover, Ukraine has a fairly well developed infrastructure that provides a good basis for growth.
Unfortunately, Ukraine’s GDP has fallen more than 60% since it declare its independence from the Soviet Union. Ukraine’s economic conditions, already difficult at the time of independence, worsened dramatically until mid 1994. At that time, Ukraine was faced with large price increases for its energy imports, budget deficit, and inflation skyrocketed.
In July 1994, Leonid Kuchma was elected president of Ukraine and newly appointed team of reformers drafted a comprehensive economic reform program. In October of 1994, Ukraine began to lay the foundations for macroeconomic stabilization and structural reforms. The government lifted most price controls, unified the exchange rate, eliminated most export quotas, reduced subsidies on bread and on public utilities sharply, and adjusted imported energy prices close to full cost recovery levels.
Expectations were set very high in 1994-96 when a new President and government came to power and seemed able to embark on an ambitious program of reform. Very soon, however, the government began displaying a lack of sustained commitment to the reform agenda. Anti-reform camp is strong. Government of Ukraine must develop a broad coalition to reduce the influence of those political and social forces that seek to preserve the status quo. This change is not likely to emerge unless civil society feels empowered and increases its demands for better government.
The reforms’ initial results were encouraging. Inflation fell sharply, the impact of trade liberalization on export performance started to be felt with the nearly 20% rise in the volume of exports to Western markets in 1995. However, overall economic activity still was on decline. Growth even appeared to be recovering in 1998, with a modest increase of 0.2 % in the first half of the year. Unfortunately, the financial crisis in the Russian Federation caused ripple effects throughout the region, including Ukraine. As a result, GDP fell 1.9% in 1998, and 0.4% in 1999. Moreover, the macro-stabilization produced by the above reforms turned out to be extremely fragile.
Recent political events have been favorable to reform. Last year, President Kuchma appointed a Prime Minister and a cabinet largely composed of officials with more progressive views toward free market economy. More important, for the first time in years, the government of Ukraine approved a strong budget for 2000 and endorsed the pro reform Government programs. These events create a great potential for moving forward on reform, but there are reasons to remain vigilant. Prime Minister Yushchenko’s Government will need to withstand pressure to maintain the status quo, particularly as the reform program starts biting into the vested interests of the more powerful oligarchs, who have deep connections within the legislative and the executive.
Economic performance has improved in the past few months. For instance, the industrial production rose at double-digit rates in the first half of 2000, with a reported annualized growth in GDP of 5 to 6 percent, as a delayed reaction to the devaluation of the Hryvnia (Ukrainian currency) and strong external demand. It now appears likely that growth might return to Ukraine for the first time in the past ten years. Progress on structural reforms has been mixed. Privatization has been proceeding at a satisfactory pace. During the first half of 2000, over 67,000 enterprises have been privatized, including over 7,000 medium-and large-scale industrial enterprises. The small-scale enterprises privatization has been virtually completed. In addition, the government has created an adequate legal and institutional structure for capital markets operation and supervision with the creation of a Securities and Stock Market Commission. Banking sector reforms have also been undertaken. For instance, starting from January of 1998, a new accounting system compatible with international standards has been introduced which allowed entry for foreign banks easier. In agricultural sector, government has achieved some success. In late of 1999, a presidential decree abolished collective farms and mandated the distribution of physical land titles to individual farmers. The parliament has also adopted a draft land code providing for a private land ownership. The government also has plans to provide more effective social protection. It has recently introduced a means-tested housing subsidy and is studying options for reforming the pension system as well as undertaking reforms in the education and health sectors.
Thus, although the year 2001 is still likely to be somewhat difficult for Ukraine and Russia position, the countries could look forward to a relatively favorable environment for an ambitious program of economic reform. There appears to be a window of opportunities for substantial advances in establishing more legitimate and inclusive infrastructure in both Ukraine and Russia. At the same time, realism must be the keyword. The legacy of three generation of Soviet economy dominance is not easy to shake, and it may take several attempts before a credible and durable breakthrough is accomplished