Ukraine's Return to Economic Growth

Abstract

An authority on the post-Soviet economies examines the factors underlying Ukraine's unanticipated return to economic growth in 2000. A preliminary, qualitative analysis of Ukraine's sudden recovery provides an opportunity to test alternative theories of transition and reconsider causes of economic growth in postcommunist countries. The paper first considers why common explanations of economic growth have not proven relevant in the case of Ukraine, identifies specific policy measures that appear to have promoted growth, and then examines the political environment in which such measures were implemented. Journal of Economic Literature, Classification Numbers: E20, O40, O50. 4 figures, 2 tables, 44 references. Until 1999, Ukraine stood out as the only postcommunist country that had failed to achieve a single year of economic growth for an entire decade, and had sustained the greatest recorded cumulative decline of all postcommunist countries not involved in war. The latter distinction may have been due to statistical error, but the absence of economic growth was for real (Aslund, 2001a). Most features of economic malaise were apparent. Market reforms had generally been tardy and implemented only partially. The budget deficit remained larger than the available financing, with annual deficits persistently being slightly bigger than planned. Nonpayments and arrears were notorious, and barter increased until 1998. While the foreign debt was not very large, much of it was caused by nonpayments, especially for natural gas imported from Russia, and Ukraine lingered on the verge of default from 1998, with currency reserves usually covering less than one month of imports. Ukraine's export performance remained poor as well. The International Monetary Fund concluded repeated agreements with Ukraine on economic stabilization, but the government invariably violated their terms, prompting the IMF to stop disbursements. The social situation was serious, with income differentiation approaching Latin American heights (Milanovic, 1998; Aslund, 2000). Ukraine had become an oligarchic economy, with a few tycoons or oligarchs dominating both the economy and politics, notably the parliament and the presidential administration, which provided the oligarchs with plenty of tax rebates, subsidies, and regulatory privileges. This was an archetypal rent-seeking society (Hellman, 1998), and Ukraine appeared stuck in a severe under-reform trap (Aslund et al., forthcoming). But suddenly Ukraine registered a substantial growth of 6 percent in 2000, primarily driven by a 13 percent increase in industrial output, 9 percent growth in agricultural •Senior Associate, Carnegie Endowment for International Peace, 1779 Massachusetts, Ave., NW, Washington, DC 20036. Caroline McGregor kindly compiled the statistics and prepared the graphs. Ukraine had a particularly large unregistered economy (Johnson et al., 1997).