After thirty years since the fall of Communism in Europe, Ukraine remains a country with unfinished institutional reforms and significant barriers for business and trade. The country gained independence when the Soviet Union dissolved two years later – in 1991.
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IRYNA FEDETS 30 YEARS LATER WILL SOVIET LEGACY STILL SHAPE UKRAINE’S FUTURE
Since then, the reluctance of the political elite to embrace market economy rules led to an incomplete transformation exacerbated by cemented oligarchic influence and rampant corruption.
Entrepreneurship was forbidden in Ukraine when the country was a part of the Soviet Union. Only in the late 1980s, the perestroika resulted in legalization of some forms of private businesses – such as individual entrepreneurship and cooperatives.
Before that, small manufactures and shortage goods traders operated illegally on the black market. Such businesses often relied on “protection” by racket gangs.
The Ukrainian economy was heavily industrialized and connected to Russia through centralized planning. In 1991, industry contributed almost 55% of Ukrainian GPD – much more than the current 23%, according to the 2018 data1. The social context – virtually absent civil society and the lack of experience of private ownership and entrepreneurship – contributed to insufficient public pressure for market economy and the rule of law2.
The economy of Ukraine took the biggest hit during the country’s first post-independence decade. In 1999, Ukraine’s GDP reached its lowest point contracting down to 41% of its 1990 volume. The upward trend in the 2000s brought the GDP to its currently highest level over the last two decades of almost 75% of the 1990 benchmark.
But the 2009 recession brought it down again. The most recent downturn happened after 2014, when the Russian occupation and the war in the eastern Ukraine started. The country’s GDP plunged down to 59% of its 1990 volume and has grown only to 64% (2018)3.
Now, slowly recovering from an economic downturn and with occupation and a war on its territory, Ukraine is one of the poorest countries in the region. The World Bank estimates that with the current growth rate, it will take Ukraine more than fifty years to reach the income levels of today’s Poland4. The country’s growth could be accelerated if it overcame the bureaucracy and corruption that restrict doing business and affect competitiveness. To achieve this, Ukraine needs to conduct institutional reforms that counter vested interests, while Ukrainian society should demand tangible transformations from political leadership.
Unlike in the neighboring EU countries, economic reforms and liberalization did not take off in Ukraine right after regaining independence. The reasons for such a situation may be found in political infighting (the then president, Leonid Kuchma, and the parliament opposed each other) as well as in the lack of public consensus about the necessity of the transition to the market economy.
The decision makers were unwilling to undertake unpopular reforms that would bring systemic changes to the economy and would go against deep-rooted social expectations about state control over land and enterprises5.
In addition, the growing influence of financial industrial groups that would later transform into state capture by oligarchs was shaping the distorted economic system with special conditions for businesses with political ties6.
The government subsidized certain sectors at taxpayers’ expense – including underpriced energy. These were mainly traditional industries that relied on cheap raw materials and, due to global conjuncture, did not require diversification and modernization.
With favorable conditions for these products on foreign markets and the fact that the enterprises in these sectors were owned by financial groups with political influence, public policy in Ukraine did little to encourage small and medium enterprise growth.
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1 World Bank (2019) Industry (Including Construction), Value Added (% of GDP). Ukraine. Available [online]: https://data.worldbank.org/indicator/NV.IND.TOTL.ZS?locations=UA
2 Kupfer, M. (2018) “Why Poland and Ukraine Took Different Post-Communist Paths”, [in]: Kyiv Post. Available [online]: https://www.kyivpost.com/world-in-ukraine-poland/why-poland-and-ukraine-took-different-post-communist-paths.html
3 World Bank (2019) GDP (constant 2010 US$). Ukraine. Available [online]: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?locations=UA
4 World Bank (2019) Ukraine. Special Focus Note. Tapping Ukraine’s Growth Potential, May 23. Available [online]: http://pubdocs.worldbank.org/en/927141558601581077/Ukraine-Special-Focus-Note-Spring-2019-en.pdf
5 Ishaq, M. (1996) The Ukrainian Economy and the Process of Reform: An Overview. Available [online]: https://www2.hw.ac.uk/sml/downloads/cert/wpa/1996/dp9616.pdf
6Balabushko, O., Betliy, O., Movchan, V., Piontkivsky, R., and M. Ryzhenkov (2018) Crony Capitalism in Ukraine. Relationship between Political Connectedness and Firms’ Performance. Available [online]: http://documents.worldbank.org/curated/en/494271528822739302/pdf/WPS8471.pdf