Colloquium 1996 Panel IV : Scenarios for Economic Development and Social Cohesion

Ukraine: Prospects and Constraints Grigory Nemiria Director, Center for Political Studies Donetsk State University, Ukraine Summary The process of socio-economic and political development in Ukraine is characterized by a remarkable mixture of old Soviet legacies and the novelties of five years of independence. It has produced a result that has both positive and negative components, with an essential portion of uncertainty and ambiguity (1). Nevertheless, it is possible to discern some basic trends and driving forces based on the complex interaction of internal political dynamics, economic reforms, institutional resources, external influences, and social and cultural realities. In 1991 Ukraine became independent without having any real program of economic and political reforms. Independence came faster than the most optimistic among Ukraine's democrats had anticipated. This does not mean that the principal areas for reform (i.e. macroeconomic stabilization, price liberalization, privatization, creation of stable fiscal and legal environments, etc.) were totally unknown things for Ukrainian elites. Furthermore, according to many estimations, Ukraine had one of the best starting positions among the fSU republics to make a successful transition. These optimistic expectations played an important role in voting for independence. However, what happened afterwards was a no-reform path (1991-1994), with a sharp decline of living standards and catastrophic figures for all basic macroeconomic indicators (See Tables 1, 2, 3). Even the generous attempt of newly-elected President Leonid Kuchma to launch a program of radical economic reforms did not bring Ukraine to the level which had been expected soon after independence. How can we explain this paradox? The answer is not so much in an absence or deficit of political will in the Ukrainian leadership, as is frequently claimed, but in a set of systemic factors which played a decisive role (and, certainly, will continue to play in the short-term and medium-term future) as serious constraints on policy formulation and implementation.

Factors of Constraint for Reform I single out three major factors: geopolitical setting, bipolar internal regional divisions, and institutional incompleteness and immaturity. Geopolitical Setting. The most important aspect of this factor is that of proximity to Russia, strong dependence on energy supply, and general interdependence of the Ukrainian and Russian economies. In 1995, Russia sent 50.2% of its CIS exports to Ukraine and Ukraine sent 83.9% of its CIS exports to Russia. Russia took 47.9% of its CIS imports from Ukraine, and Ukraine 81.6% of its CIS imports from Russia. As 55% of all Ukraine's exports went to the CIS, this meant that just under a half, or 45%, of Ukraine's total export trade was with Russia. Slightly over half (52%) of Ukraine's total imports came from Russia. Ukraine continues to be lopsidedly dependent on Russian imports, which account for 90% of its oil, 60% of its timber, 80% of raw materials for light industry and 70% of components for the engineering industry (2). Thus, Ukraine's position within the former Soviet space affects its current development. To compensate for its dependence on, and one-sided affiliation with, Russia, Ukraine has to diversify its trade and economic relations. New relations with other states have had to be developed almost from nothing. Obviously, this takes time. Regional Divisions. Ukraine is often considered as a country having two poles, i.e. the Eastern one (with the center in Donetsk) and the Western one (with the center in Lviv). These key peripheries differ in ethno-linguistic (with the remarkable presence of ethnic Russians and domination of the Russian language in the East and domination of Ukrainians and the Ukrainian language in the West), religious (orthodoxy vs. Catholicism), social and cultural (collectivism and state paternalism traditions vs. those of individualism) characteristics, and in the type of economic orientation (state property vs. private property), geopolitical preferences (pro-Russian, Eurasian vs. pro-Western, European) and attitude to the past. Also, it should be mentioned that in the Ukrainian context a traditional dichotomy "center-periphery" has an important nuance in comparison with the situation in Russia. While Russian regions have had no reason to re-consider their geographical and political relation to the center (Moscow was and remains the center), Ukrainian regions were forced to rethink their political location. For them the center moved from Moscow to Kiev, which before 1991 was considered as a center only in a neutral territorial sense. Furthermore, the Northern and Eastern Ukrainian regions have to accommodate themselves to a new status of border regions. This role, normal for a long period of time for the population of Western Ukraine (i.e. state borders with Poland, Slovakia, Hungary, Romania), became completely new for the inhabitants of the "new border zone" (i.e. state borders with Russia). Not surprisingly, many Ukrainian regions experience a painful process of re-thinking their identity, role and place within the boundaries of the new state. One of the Soviet legacies inherited by independent Ukraine, was an extreme economic disparity among the regions (see Table 4). The most vulnerable of the crisis industries are located in the regions united by the following peculiarities: i) they have a considerable share of ethnic Russians in the population; ii) they border Russia; iii) they are the most "soviet" among Ukrainian regions; and, iv) they have influential left wing political forces advocating the development of integration within the CIS framework and for "strategic union" with Russia. Ukraine is being affected by different integration poles to various extent. At present, integrative and disintegrative factors are acting simultaneously. Their complex and controversial interaction obviously makes an impact upon the pace and forms of state and nation building, and on regional dynamics. Different segments of national and regional political elites favor contradictory geopolitical orientations and different external and domestic integration policies. Integration thus becomes both a policy tool and a focus of political dispute among state-builders. Given this remarkable regional diversity, Ukrainian decision-makers always have to consider the threat that any socially divisive radical reform may produce additional regional tensions, with implications both for Ukraine's internal cohesion and its external orientations. Institutional Incompleteness and Immaturity. For Ukraine, a newly born country and a former "quintessential imperial periphery" (3), one of the most serious obstacles in socio-economic and political development is the lack both of a well-trained elite and of institutions. The seriousness of this problem is partly reflected in the fact that Ukraine is the only post-Soviet country lacking a new constitution. The constant bickering between the different branches of political power has contributed to political uncertainty and the delay of reforms. Due to the suddenness of independence, Ukraine had to cope with a striking continuity among the administrative elite and the old institutional apparatus of sectoral ministries and local and regional councils. In a period of transition, this strengthens the negative effect arising from the absence of sufficient coordination between sectoral government structures and regional government structures. At the same time, a combination of the immaturity of both the Ukrainian elite and Ukrainian institutions, the nomenklatura-like essence of national entrepreneurship, and a severe economic crisis, in many cases produced a symbiosis of state bureaucrats at various levels, leaders of the black economy, and criminal-world bosses, cementing these forces into a "shadow nomenklatura". Therefore, corruption has tended to emerge as one of the barriers to market-oriented economic reforms. The major challenge for the Ukrainian leadership in the current situation is to provide a convincing answer to the question: How can reforms be advanced while preserving stability? In spite of the variety of factors and actors mentioned above, and of some very controversial conditions, in practice after five years of independence the set of choices for Ukraine is limited. Fortunately, we can exclude as completely unrealistic a variant of a catastrophic future (i.e., state breakup and civil war). A critical mass of social cohesion, state institution building and level of consensus among political and economic elites prevents the possibility of a catastrophic scenario. The alternative development paths for Ukraine can be clustered around three main scenarios: pessimistic, optimistic and realistic (see Chart I). Of course, these scenarios are to some extent abstract and hypothetical, designed to serve as pure models. The real future will probably be more complex and will incorporate some features from all three scenarios. Nonetheless, they do illustrate different trends that might emerge, even if they do so in a rather simple way. Naturally, the "optimistic" scenario is the most preferable one. However, in the light of current trends and constraints, the "realistic" scenario is the most likely.

Table I   Scenario 1. Pessimistic Scenario 2. Optimistic Scenario 3. Realistic Prevailing tendency (A.-internal, B-external) A. Inconsistent reforms B. Reintegration under Russian dominance A. Strong market reforms B. Cooperative integration A. Gradual market reforms B. Cooperative independence Economy - state intervention, regulated market - ad-hoc adjustment without concept - non-selective social security measures - market economy in place - selective social security measures - privatization finished, microeconomic liberalization   - "socially oriented" market economy - combination of stabilization and industrial policy - selective protectionism - increasing market competition logic Politics - low government capabilities - strong industrial and agricultural lobbies - corporatism - reformers in power - democratic state with rule of law - complex policy-making, highly bureaucratic Center-Regions relations - politically active Western Ukraine - lack of coordinating institutions - devolution of power - transparent rules - viable coordinating and decision-making mechanisms - selective bargaining/ relative strength of regions with stronger bargaining chips - consultative role of Council of Regions Social cohesion weak, governance by coercion strong middle Russia - strong dependence on Russia; "Lebedin-ization" of Russian Policy in the "near abroad" - important - healthy trade balance - elimination of excessive dependence on energy supply - important - energy debt - "special relations" West - unimportant - important - important -bilateral diplomacy prevails Multilateral institutions - unimportant, - CIS is dominated by Russia - important - integration into Europe - important - associated membership         Comparison Belorussia Poland           Probability 15% 15% 70% Table II Basic Macroeconomic Indicators (variability rate for a respective period, %)   1990 1991 1992 1993 1994 1995 GDP -4.0 -13.5 -16.8 -14.2 -23.0 -11.8 Industrial Output -0.1 -4.8 -6.4 -7.6 -28.2 -11.5 Agricultural Output -3.7 -13.2 -8.3 1.5 -16.0 -2.6 Consumer Goods Output -5.8 -5.1 -9.4 -15.9 -25.0 -19.1 Capital Investments 1.9 -7.1 -36.9 -10.3 -25.0 -30.0 Source: Ukrainian Ministry of Statistics Table III Dynamics of Basic Macroeconomic Indictors (comparative values, 1990 = 100%)   1990 1991 1992 1993 1994 1995 GDP 100.0 86.5 72.0 61.7 45.6 40.2 Industrial Output 100.0 95.2 89.1 82.3 59.1 52.3 Agricultural Output 100.0 86.8 79.6 80.8 65.4 63.7 Consumer Goods Output 100.0 94.9 86.0 72.3 56.1 45.4 Capital Investments 100.0 92.9 58.6 52.6 40.2 26.1 Source: Ukrainian Ministry of Statistics Table IV Regional Dimension of Ukraines Industrial Output, %   East West Center & North South 1992 57 11 23 9 1993 49 12 29 10 1994 54 11 26 9 1995 57 10 25 8 1996 Q1 57 10 25 8 Source: Ukrainian Ministry of Statistics, European Centre for Macroeconomic Analysis of Ukraine, Ministry of Economics of Ukraine, Ukrainian Economic Trends, April 1996. East (Donetsk, Luhansk, Dnipropetrovsk, Zaporizhzhya, Kharkiv); West (Volyn, Transcarpathya, Ivano-Frankivsk, Lviv, Rivne, Ternopil, Chernivtsi); Center & North (Vinnytsya, Zhytomyr, Kiev, Kirovohrad, Poltava, Sumy, Khmelnytsky, Cherkasy, Chernihiv); South (Crimer, Mykolaiv, Odessa, Kherson).

EBRD, Transition Report Update, April 1996 Ukraine                   1989 1990 1991 1992 1993 1994 1995 Estimate 1996 Projection                   Output and expenditure (Percentage change) GDP at constant prices 4 -3 -12 -17 -17 -23 -12 -2 Private Consumption 5 2 -8 -9 -21 -22 na na Public Consumption 7 5 19 -17 -26 na na na Net fixed investment -2 -32 -79 -37 -23 na na na Industrial Production 3 0 -5 -7 -8 -28 -14 na Agricultural Production na na -19 -9 -2 -16 -9 na                   Prices and wages                 Consumer prices (annual average) 2.2 4.2 91 1,210 4,735 891 375 90 Consumer prices (end-year) na na 161 2,000 10,155 401 180 60 Producer Prices (annual average) na 4.5 125 2,384 3,962 904 na na Producer Prices (end-year) 1.7 4.5 163 4,129 9,668 559 na na Average wages (annual average) na na na 1,523 3,850 317 420 95                   Monetary sector                 Broad Money (end-year) na na na 921 2,103 465 85 na Net domestic assets of the banking system (end-year) na na na 1,280 1,242 476 114 na                   Government sector (in per cent of GDP) General government balance(1) na na -13.6 -29.3 -9.7 -10.5 -3.3 -3.5 State budget balance(2) 5.8 2.6 -14.1 -30.4 -11.6 -8.6 -4.1 na State budget expenditure(2) 27.3 31.4 41.0 71.9 54.3 52.9 45.4 na State budget revenue(2) na na na 41.5 42.9 44.3 41.3 na                   External data (in billions of US dollars) Current account balance na na -2.9 -0.6 -0.8 -1.4 -1.3 -1.3 vis-à-vis non-FSU countries na na na na 0.7 0.4 0.5 na vis-à-vis FSU republics na na na na -1.5 -1.8 -1.8 na Nonfactor services na na na na 1.6 1.0 0.7 na Merchandise trade balance total -9.0 -12.7 -3.4 -0.6 -2.5 -2.3 -1.9 -3.1 vis-à-vis non-FSU countries -0.8 -2.6 -2.7 0.5 0.5 0.3 0.6 na vis-à-vis FSU republics -8.2 -10.1 -0.7 -1.1 -3.0 -2.6 -2.5 na Exports 77.1 74.6 50.0 11.3 12.8 11.8 12.4 na to non-FSU 14.0 13.2 7.3 6.0 5.2 4.6 5.3 na to FSU republics 63.1 61.4 42.7 5.3 7.6 7.2 7.1 na Imports 86.1 87.3 53.4 11.9 15.3 14.2 14.3 na from non-FSU 14.8 15.8 10.0 5.5 4.7 4.3 4.7 na from FSU republics 71.3 71.5 43.4 6.4 10.6 9.8 9.6 na Miscellaneous items (Denominations as indicated) Population (in millions) 51.7 51.8 51.9 52.0 52.1 51.7 51.3 na Employment (percentage Change, end-year na -3.5 -1.6 -5.0 -6.1 -7.5 -6.7 na Unemployment rate (in percent, end-year) 0 0 0 0.3 0.4 0.4 0.6 na GDP (in billions of roubles until 1991; in trillions of karbovanetsi after that ) 154 165 295 5 148 1,137 4,877 na GNP per capita (in US dollars) at PPP exchange rates(3) na na na na na 3,330 na na The share of agriculture and fisheries in NMP (per cent)(4) 28 30.3 30.2 22.5 16 na na na The share of industry and mining in NMP (per cent)(4) 42.6 41.3 42.4 50.7 52 na na na Exchange rate (roubles or karbovanetsi per US dollar, annual average)(5) 0.62 0.59 1.74 253 7,629 63,224 148,000 na Data for 1989-94 represent official estimates of outturns as reflected in publications from the national authorities, the international monetary Fund, the World Bank, the OECD. PlanEcon and the Institute of International Finance. Data for 1995-1996 reflects EBRD evaluations, partly based on preliminary estimates from 1995 from the afore-mentioned sources. The general government sector includes the state, municipalities and extra-budgetary funds. the state budget includes direct credits. All balances are quoted on a cash basis. PPP stands for purchasing power parity. The estimate quoted here stems from the "World Bank Atlas 1996". In the computation of this estimate the countrys nominal GNP per capita in local currency was divided by the "purchasing power parity", defined as the number of units of the countrys currency required to buy the same amount of goods and services in the domestic market as one dollar would buy in the United States. NMP excludes depreciation and the value added from most of the service sector. Roubles per US dollar until 1991, karbovantsi per US dollar thereafter (non-commercial interbank exchange rate). European Bank for Reconstruction and Development Footnotes For an optimistic evaluation of Ukraine's record see: Anders Aslund, "Eurasia Letter: Ukraine's Turnaround", Foreign Policy, no.100 (Fall 1995), pp. 125-143; John Edwin Mroz and Olexandr Pavliuk, "Ukraine: Europe's Linchpin", Foreign Affairs, vol 75, no.3 (May-June 1996), pp. 52-62. Pessimistic views are expressed in: Olexandr Dergachov, Volodymyr Polokhalo, "The Metamorphoses of Postcommunist Power", Political Thought, no. 1, 1996, pp. 115-121. Andrew Wilson and Igor Burakovsky, The Ukrainian Economy under Kuchma (London: the Royal Institute of International Affairs, 1996), p. 35. Alexander Motyl, Structural Constraints and Starting Points p. 4.