Ukrainian Economy: Before and After The Elections

So much muck was slung at our economy during election battles by wannabe lawmakers that it would be fair if those who made it to Verkhovna Rada repented what they did. I do not mean the representatives of the hard opposition alone. We all remember a curious incident when the leader of one of the most respectable blocs and former vice premier (Viktor Pynzenyk – Ed.) prophetically declared that without Yushchenko the Ukrainian economy suffered such heavy losses that it was now in a very bad way and grinding to a complete halt soon. The key to understand the essence of new Ukrainian messiahs can well be found in this particular incident, which was nothing but groundless myth making and bending the truth. Ironically, the voters fell for it. But it is clear to each and all that such tricks will not help their authors keep afloat for long.

QUALITATIVE CHANGE

We still have a long way to go before we recover from the deep economic slump that began in the Soviet period and was the result of contradictions inherent in the state-regulated economy. During the slump Ukraine lost almost half of its economic potential, with real incomes of Ukrainians falling even more. Meanwhile, last year’s economic growth has surpassed several times the most optimistic projections. According to the World Bank forecast made public in 1999, GDP growth was to have been 2% in 2000 and 4% in 2001, while actual growth was 5.9% and 9.1% respectively. In 2001 industrial production increased by 14.2%, agricultural production by 9.9%, with services and trade rising by 24.3%. As a result, in 2001 Ukraine found itself among the world leaders for economic growth.

However, this is not the whole picture. The positive results reached in 2001 were not limited to quantitative indicators. Without doubt, Ukraine has turned the corner on qualitative change in its economy.

The structure of economic growth has changed: unlike 2000, when GDP growth was accompanied by high inflation, in 2001 it occurred when inflation was declining and investments rose significantly. Recall that 2001 inflation was a mere 6.1% against 25.8% in 2000. In 2001 investments in basic capital grew by 17.2%, or 2.6 times more from 2000. These and other indicators mark a changeover from the inflationary to the investment model of economic growth which began in 2001.

Another important feature of 2001 was the growth in the machine building, light, and food industries. For the first time in recent years economic growth was followed by a fall in official unemployment rates and anticipatory growth of real wages. While in 2000 the pay of Ukrainians dropped by 1%, in 2001 it showed a significant rise of 19.3%. These are important changes which cannot be shrugged off. Wage arrears were reduced by 43.9% and real pensions went up by 30%.

Anticipatory growth in the purchasing power of Ukrainians, investment, production, and socially targeted industry sectors mark another very important trend – expansion of the domestic market. This has been proven by a significantly rising share of trade in GDP structure. According to expert evaluations, the share of the shadow economy has shrunk, from 40% in 2000 to 34% in 2001, with the share of barter transactions down from 18.8% to 8% at the beginning of the year.

For the first time positive change has occurred in foreign trade, with the export of machinery and equipment reaching 26.2% in 2001 and food products 32.4%, while export of steel grew only by 3.9%. The structure of imports has improved, with purchases of state-of-the-art machinery and equipment growing by 22.5%. All these positive changes took place against the backdrop of shrinking foreign state debt. Simultaneously, our hard currency reserves increased from $1.5 billion to $3.1 billion. A significant increase in credit rating for the Ukrainian economy came as a sign of international recognition for these positive changes.

The press has not been unanimous in evaluating these processes, with many analysts putting our successes down to favorable situation on foreign markets and hryvnia’s excessive devaluation in 1997-1999. These factors were truly important, but it would be a misconception to disregard effective free market reform and the increasingly strong competitiveness of Ukrainian producers.

Their immediate impact was manifested in higher labor productivity, notably, in industry. Recall that in line with Marxist theory this indicator was regarded as a major one for the triumph of Communism. Now we all agree that the Soviet Union lost in the economic tug of war with the West due to its failure to reach higher labor productivity.

In this context, some interesting comparisons can be made. Under the Soviet Union, labor productivity in Ukraine grew as follows: up by 15% in 1980-1985 and 21% in 1986- 1990. According to the State Statistics Committee, this indicator grew by 74.5% in 1997-2001, including 18.6% in 2001, with the present level of labor productivity in industry exceeding that of pre-crisis 1990 by 19.8%. The economic, let alone political, significance of these results can hardly be overestimated. To use Marxist terminology, we are moving toward final victory in the economy by introducing systemic changes there. We are moving in the right direction and only prejudiced politicians can doubt it.

FORECASTS

Let me emphasize that a slowdown in the economy in the first quarter with GDP growing merely by 3.6% in January-February cannot be called an anomaly . First, the slowdown had been predicted earlier. Second, lower growth cannot signify that the Ukrainian economy is approaching a new stage of a depression, as some of our backyard prophets maintain. It would be more correct to say that some deep processes are taking place. The fact is that in 2002 Ukraine’s economy began to enter a stage of permanent growth not subject to excessive growth rate fluctuations, as was the case last year. There are various approaches for defining the corridor and duration of such growth. For example, the IMF has recently come up with its assessments whereby GDP will increase in Ukraine by 5% in 2002 and 4% in 2003. According to a prediction by the Institute for Economic Forecasting which includes first quarter results, GDP will grow by 6% in 2002 and 5.5% in 2003. Economy Ministry experts say that in 2002 GDP will be up by 6% and in 2003 by 7%. This rate of growth, including the results of 2001, are way above projected indicators for the world economy, 1.4%-1.7% in 2002 and 2.3%-2.5% in 2003.

A medium-term forecast for Ukraine’s economy is given in a recently prepared document on strategies for Ukraine’s economic and social development in 2002-2011 called “European Choice” which will soon be submitted to Verkhovna Rada by the president. The document projects a 5-6% average annual growth for 2002-2004, to be followed by slight acceleration to 6-6.5% in 2005-2011. This forecast has been based on the assumption that the growth cycle span for Ukraine’s economy could equal the duration of the economic slump, or ten years. Incidentally, these assumptions tally with the 1999 forecast by the World Bank setting Ukraine’s average annual economic growth at 6.5% in 2002-2005 and 8% in 2006-2009. This is an optimistic scenario, requiring extremely complex systemic changes and, most importantly, steady pace of economic reform. In the other scenario, the pessimistic one, the World Bank predicts a 0.9% annual economic growth for 2002- 2005 and 2.5% for 2006-2009.

PREREQUISITES FOR THE OPTIMISTIC SCENARIO

There are several prerequisites for the optimistic scenario in Ukraine’s economy. First, it is the need to combine medium and long-term cyclic mechanisms involving, on the one hand, large-scale replacement of fixed assets and, on the other, completion by the Ukrainian economy of its industrial cycle and intensive changeover to the post industrial system. At present, in its intellectual, research, and technical potential, as well as for the level of industrial development of some isolated production enclaves, the Ukrainian economy is quite close to, and in some cases even meets, postindustrial standards. It follows that, given a favorable situation and adequate state policy, Ukraine could become a quick learner of the new model of civilization. Take just one example: out of twenty-two basic technologies developed in the space sector Ukraine currently uses seventeen, which puts it among the top five developed countries in the world.

Successful combination of medium and long-term cyclic mechanisms opens up another favorable perspective, developing the domestic market. Ukraine belongs to a minority of countries where the share of exports in GDP structure reaches almost 60%, with a mere 40% for domestic consumption. Elsewhere in Europe the share of exports is 20% on average, while about 80% of GDP is sold on domestic markets. It is important that the mentioned growth potential can be realized even under unfavorable foreign markets conditions.

In this context, the value of an active state policy aimed at developing domestic markets and modernizing industry is vital for our economy’s progress. Most importantly, many of the tasks facing us in these areas can be solved using our own research and cadre potential, resources offered by Ukrainian industry, multifaceted cooperation with industrial producers in other countries, and joint ventures with foreign investors.

The optimistic scenario according to which the Ukrainian economy might develop in the short-term and medium-term perspective implies effective state policy in the areas mentioned.

SUMMARY

One of the most widely debated issues is the possibility of forming a coalition government in the wake of the general elections. I personally view the idea with great caution. If, due to only political reasons, such a government is formed, it must necessarily be made up of politicians who realize the limitations imposed by the neoliberal model for the development of the Ukrainian economy, as well as the acute need for a transition to the innovative model for market reforms to be accompanied with sweeping institutional change and elements of effective regulation by the state. Most of the Latin American countries found themselves on the sidelines of global development because in their policy of reforms they leaned too much on the neoliberalism imposed on them from outside. We are well aware that among those vying for office in government there are many politicians who base their economic agendas on similar principles. For an economist involved in plotting and implementing the present economic policy, this gives me some concern. If, prior to the general elections, the main juxtaposition was made between the market and non- market economic models, now the debate has moved onto a different plane, that of choosing between the neoliberal and institutional models. I am convinced that the latter has no alternative.