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[Ukrainian Statehood in the Twentieth Century: Historical and Political Analysis. Kyiv: Political Thought, 1996. pp. 353-366.]

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In Search of a Model of Economic Development


Economic transformation is a complex socioeconomic phenomenon in which it is far from easy to identify a clear-cut and unequivocal cause-and-effect relationship between specific events, actions of individual economic players, and their consequences. For this reason, there is a serious danger of resorting to rather broad generalizations when analyzing transformations as an economic process and thus underrating the specifics of a transition economy. On the other hand, there is a temptation to treat individual (accidental) phenomena as laws and trends characteristic of transition to a market economy as such.

1. Strategies of Economic Transformations

The essence of socioeconomic transformation in general comes down to changing the existing economic order (economic system) and promoting economic growth. Obviously, every society is interested in minimizing the costs of such changes. This is why a country, when choosing a certain economic strategy, in fact decides for itself how to combine transformations with the achievement of economic growth. This problem can, however, be also put another way: what kind of changes should be effected to take the path of a steady economic development? As a whole the strategies of economic transformation pursued by various countries can /354/ be divided arbitrarily into three large groups.

1. The transformation model of a developing country. This strategy is usually pursued by economically backward states. Its key element is industrialization as the chief means of overcoming economic backwardness and bridging the gap with the industrially developed nations. Such a strategy (also known as the catch-up strategy) was once played successfully in the new industrial countries. This model can by and large assume two basic forms: export orientation and import substitution.

The roots of this model may be found in West European countries at the time of industrial revolutions. The Meiji restoration in Japan and industrialization in the former Soviet Union can also with certain reservations be attributed to this model.

2. The economic reconstruction model. This was implemented successfully in the countries pi Western Europe and Japan after World War II. Postwar reconstruction also took place in the former Soviet Union. The experience of East and Central European countries, where a Soviet-type economic system was established, can also be referred, to some extent, to this model. In this case reconstruction was accompanied by political and economic changes of a systemic nature.

3. The systemic change model. This can be treated as a certain combination of the elements of the first and second strategies. But, unlike under those strategies, system change envisions transition from an administrative command economy (based on state property and vertical hierarchical relationships) to a market economic system (based on different forms of private property and a combination of vertical and horizontal relationships). It is noteworthy that the former socialist countries did have certain market-type relationships (consumer market, distribution of resources through socalled "bureaucratic market," etc.), but economic activity was chiefly coordinated through vertical "state state enterprise" links. This makes it impossible, e.g., to regard the /355/ Japanese post-war economic development as a system transformation despite the scale of economic changes that occurred in that country after World War II.1

Every country molds and pursues its own economic strategy combining elements of different approaches to economic growth. For this reason, the proposed classification fulfills rather a simple task: to identify the initial conditions which preceded the changes (economic backwardness, ruined economic potential as a result of war, crisis of the existing model of economic development). In a structural sense, the economic development of any country is characterized by the presence and quality of production factors (labor, capital, land, entrepreneurship) and the techniques of their utilization (in other words, economic policy in a broad sense of the term). Economic policy as such is worked out and pursued under the influence of the external and internal economic environment in which a national economy functions.

The character of economic policy may vary from radical measures (so-called shock therapy) to gradualism or in one way or another combine aspects of both. This is a question of the content of transformations rather than of their speed. Thus, for example, an emphasis on import substitution or export orientation may be regarded as an element of radical (shock) transformation.2

The economic policy in Ukraine may be arbitrarily divided into two stages. The first stage (1991-1994) is mainly characterized by forced moves towards the liberalization of prices and foreign economic activity taken under pressure from Russian transformations and the international community. But, as a whole, there was in fact no truly radical (in terms of a market-type transformation) or consistent policy. This was officially explained by Ukraine's intention to follow its own "special" way of reforms in order to minimize the socioeconomic costs of transition. Administrative measures dominated economic policy. Yet, a series of conceptual documents and laws were adopted which not so much regulated the economic processes as played an "enlightening" /356/ role. This period in Ukraine saw the deepest and most rapid crisis phenomena of all the postcommunist countries, and all pre-existing financial and other resources were exhausted.

The second stage, from 1994 onwards, may be treated as an attempt to effect changes in the economy (acceleration of privatization, financial stabilization, creation of a market infrastructure, etc.). The economic policy of this stage is in fact a combination of monetary and administrative measures, which may be called "administrative monetarism" or "monetary administering." This is accounted for by a factual preservation of the structure of corporate interests and hence the system of corporate links typical of a "bureaucratic market" as well as by a dynamic renewal of geopolitical strategies of the world's leading states.

Like all the postcommunist countries (China is the unique case in history of economic reforms under a communist regime), Ukraine launched the process of economic transformations in a state of systemic crisis. Yet, the scale of this crisis (drop in output, inflation rate, etc.) turned out to be by far the widest as compared to other transition economies.

Moreover, Ukraine was late in identifying its strategic course of reform and take practical steps in this direction, and this lateness is largely responsible for the present economic hardships.

In a relatively short period of time Ukraine also had a few powerful outside shocks: withdrawal from the rouble zone (having no system of payments with other former Soviet republics) and introduction of a new system for procuring oil, gas, and other resources (new supply channels and making the transition to world prices). The economic situation in Ukraine was further worsened by an abrupt change in the mode of economic (mostly intra-sector) links between enterprises, i.e., transforming these domestic economic links into foreign ones.

Immediately after the collapse of the Soviet Union and the inherent system of inter-enterprise links, the Ukrainian /357/ economy came under the powerful influence of international economic competition. Many, if not most, enterprises found themselves unable to compete on the international market.

Finally, the Ukrainian political and economic elite lack a deep analysis of not only the international experience but also of their own mistakes, they fail to realistically assess present and future opportunities and tendencies. Certain strategic decisions seem to be made by intuition or under the influence of outside circumstances.

2. The Starting Conditions of a Transformation Process

Obviously, an economic policy should be based on detailed analysis of the initial economic conditions which identify the starting point of economic transformation. These conditions differ in various countries and largely determine a strategic direction of transformations, placing, so to speak, "natural" limits on the utility of foreign experience.

In per capita gross domestic product (GDP), Ukraine was 8th in the former Soviet Union, $5200 (US) in 1990.3 This shows that Ukraine, with its considerable industrial potential, was inferior to other republics in planning its utilization.

Ukraine inherited from the Soviet Union only a part of an economic complex with all the results flowing from it. This meant in practice that the layout of production capacities and their patterns of reciprocal ties did not coincide with the existing administrative and territorial borders. Moreover, Soviet industrial strategy was based on the idea maximizing economies of scale and did not take into account national and territorial boundaries.

It is noteworthy that the Soviet economy encountered considerable difficulties back in the 1970s could then alleviate them through a large-scale export of raw materials (especially oil and gas). The hard currency earned was primarily used to increase the import of the consumer and intermediate goods, which postponed any resolute action to over-/358/come the faults of the command administrative economic system.

The critical condition of the economy was further aggravated because a large part of industrial capacity was obsolescent and outdated, and various elements of production capital were being replaced or modernized on a far from adequate scale. After World War II Kremlin economic policy denied Ukraine sufficient investments to improve and develop its industrial infrastructure. For this reason independent Ukraine has inherited an antiquated logistical base and enejgy/resource-consuming production technologies which are the main cause of environmental pollution.

In addition, Ukraine has limited oil and gas deposits of its own which do not meet its energy and petrochemical requirements in industry. And, as noted above, the Ukrainian economy traditionally rested on resource- and energy-consuming technologies.

A conclusion can be made on this basis that Ukraine, like other postcommunist states, badly needs fundamental large-scale modernization, even reindustrialization. Today the Ukrainian industrial sector (though rather developed compared to other former republics) also needs profound structural changes to adapt to world market requirements and thus make it internationally competitive.

The postcommunist modernization in question differs greatly from processes in other countries. Transition economies face the necessity of restructuring in the broad sense of the term an already existing industrial base which was created and developing along the lines differing from standard concepts employed by, say, the new industrial countries.

Industrial production in the socialist-type economies was developing on a far-from-market basis (predominance of political considerations over economic ones, a distorted system of price relationships, etc.) and was mainly directed at achieving self-sufficiency and substituting for imports from Western countries. Of course, the administrative command /359/ economy was not fully autarchic in the literal sense, but that economic system lacked adequate incentives for the large-scale export of industrial goods, except probably to partners in the socialist system.

Modernization in the postcommunist countries also differs essentially from the, so to speak, "primary" process of industrial development in market-economy countries. Under present conditions, restructuring objectively has to be more "foreign-oriented" than it was in the nineteenth and early twentieth centuries when the domestic market played a more important role. This is also true for Ukraine.

Thus, Ukraine faces the necessity of combining effectively two extremely complicated processes: technical modernization and introduction of market-economy principles.

3. The Formation of a Postcommunist Economic System

The changes since 1991 in the Ukrainian economy are of a contradictory nature. Today's Ukrainian economy is characterized by a whole series of features and tendencies which cannot be treated as only the result of mistakes and drawbacks in the economic policy. We seem to be dealing with a qualitatively new phenomenon which may rather arbitrarily be called an "under-reformed" economy or a postcommunist economic system.

This kind of economic system in Ukraine has rather clear-cut characteristics, some typical of other transition economies, others unique to Ukraine. First, the economy of Ukraine is still in the throes of a crisis characterized by a continued production slump (see Table 1).

The greatest danger is the drop in investments, for this only increases Ukraine's technological lag behind the industrially developed countries. Yet, it is worth noting that 1995-1996 saw the first signs of financial stabilization: in 1995 the inflation rate was 182% (10,155% in 1993, 401% in 1994).4 However, even here one still cannot speak of stability in the short and medium terms. /360/

Despite the industrial slump and the objective necessity for a rapid streamlining of production (caused by factory shut-downs and' workforce cuts), the unemployment level remains very low according to official data (0.46% of the able-bodied population as of late December 1995), while Ukraine's labor resources are an estimated about 29 million

Table 1.

Chief macroeconomic indices for 1990-1996 (percent change from previous year)







January May 1996

Official GDP


- 13,5

- 16,8

- 14,2




Gross industrial output








Gross agricultural output


- 13,2



- 16,5


Consumer goods output




- 15,3


- 19,1

- 16,2

Investments in capital assets




- 10,3




* For January march 1996.

(Source: Ukraine. The Real Economy and Its Sectors. A Quarterly Statistical Abstract. The World Bank: Kyiv, Ukraine. Volume II, Issue 2, May 1996, Table 1.1). /361/

people.5 Yet, according to some estimates, the potential number of the unemployed in Ukraine may reach two to five million people.

Certain changes have taken place in the structure of production. While in 1993 the state owned 96% of all capital assets, by late 1995 its share had dropped to 62%.6 It is, however, noteworthy that today new economic (non-governmental) entities (subjects of productive and commercial activities) are being formed mainly through privatization, i.e., as a result of the redistribution of available assets and intensive use of state-budget funds. This shows that there are still no incentives for any process of a large-scale "self-generation" of private capital based on the accumulation of income from productive and commercial activities by non-governmental businesses and private savings. A process of "natural" import substitution goes on in Ukraine at the level of industrial sectors and specific industries. The break-up of inter-republican cooperation ties necessitated the search for new procurement sources of certain goods and resources which Ukrainian businesses had traditionally received from former Soviet republics. This problem is extremely acute for Ukraine in particular, for the latter traditionally specialized within the former Soviet economic complex in producing various intermediate products, while end products were manufactured in Russia and other republics. This is the reason why Ukrainian enterprises have started setting up closed production cycles and are trying to restore cooperation ties, particularly by forming financial-industrial groups.

The state is more actively intervening in the redistribution of financial flows. This is expressed in a growing share of budgetary funds and a decreased share of the financial resources of primary economic agents (see Table 2).

This indicates that the state still remains the main economic player today. A characteristic feature of the Ukrainian economy is the fact that most of financial resources are used for social needs (see Table 3).

The above data outline a tendency to increase the ex-/362/penses of the state and economic entities for social needs, while expenses for economic development steadily decline. But this reduction also to some extent reflects diminishing subsidies and privileges to producers. In general, a conclusion can be drawn that today the economy of Ukraine is more social-oriented than "economic-incentive."

As is the case with other postcommunist countries, the economy of Ukraine is composed today of three rather distinct sectors. First, it is the official economy, i.e., the productive and commercial activity in compliance with legislation in force which uses money as a form of payment. Its scope can be determined more or less accurately from official statistical data.

The second sector may be arbitrarily called marginal. Economic activity within its limits is regulated by legisla-

Table 2.

The structure of finances in Ukraine






1996 (estim.)

Budgetary funds







Financial resources of enterprises







Financial resources of centralized funds'







* Excluding resources of the Pension and Chernobyl Clean-Up Funds. (Source: K. V. Pavlyk, "The State' Financial Resources: Essence, Composition, and Structure," Finansy Ukrainy, 1996, No. 2, p. 21. in Ukrainian). /365/

tion only to some extent, while the main instrument of exchange is barter. The marginal sector is only partially subject to statistical estimate, meaning that its role in the economy can be assessed in relatively rough terms. Let us note that, depending on the* economic and political situation, this sector may transform into either the official or a shadow one.

The unofficial ("shadow") economy makes up the third sector. It is mainly characterized by using money (sometimes barter) as an exchange instrument outside officially registered financial institutions. In this case only a portion of the productive and commercial activity led by the shadow economy is associated with breaching legislation in force or is of an utterly criminal nature.

The situation is specific in that the functioning of the economy is more often than not determined not so much by official decisions and actions as by a rapid development of the "shadow" sector. According to a World Bank expert estimate, the share of unofficial economic activity in Ukraine's total GDP rose from 12% in 1989 to about 65% in 1996.7

Table 3.

The structure of the utilization of financial resourses, %







Economic development expenses







Expenses for social needs







(Source: K. V. Pavlyk, "The State' Financial Resources: Essence, Composition, and Structure," Finansy Ukrainy, 1996, No. 2, p. 23-24. in Ukrainian). /364/

This means that today the scale of shadow activities exceeds that of official business. Also noteworthy is the fact that the same natural and juridical persons pose as subjects in both the shadow and official economies.

Another characteristic of Ukrainian economy today is the steady and rapid growth of both domestic and foreign debt.

As of February 1, 1996, the domestic public debt was 229 trillion krb or 15.4% GDP. About 96.7% of this are state budget arrears to the National Bank of Ukraine (NBU). Yet, it should be noted, to be objective, that the NBU is trying to scale down this form of credit with some success: while in 1990 NBU credits were 28,043 billion karbovanets, in 1995 they were 3,677 billion krb.8 Meanwhile, foreign debt rose by 19.9% from 1992 to 1993, 70% from 1993 to 1994 and 22.8% from 1994 to 1995. According to some estimates, Ukraine's foreign debt at the end of 1995 was $8.8 billion US or 30.4% of GDP. B. Sobolev, Deputy Finance Minister of Ukraine, thinks that in 1997 Ukraine may approach the dangerous point when a foreign debt makes up about 80% of GDP. Russia is Ukraine's largest creditor $3.4 billion, followed by the IMF at $2,288 million and Turkmenistan at $792 million.9

Yet another defining characteristic of the Ukrainian economy is the growth of inter-enterprise debt. Thus, in January-April 1996 creditor indebtedness between Ukrainian enterprises and the economic entities of other former republics rose by 22% and reached 230 trillion krb. in early May (debtor indebtedness grew, accordingly, by 12% and reached 69 trillion krb.).

Debtor indebtedness between Ukrainian businesses themselves in the same period grew by 51% and reached 3,359 trillion krb. in early May, while creditor indebtedness rose by 50% (4580 trillion krb.). At the same time, the gross domestic product was 2748 trillion krb.10

However, there were no bankruptcies of major enterprises. /365/

The volume of Ukraine's foreign trade has risen (e.g., in

1995 alone exports rose by 16.4% and imports by 14.4%), though its geographical and commodity-wise structure has not changed essentially.

The main export goods remain ferrous metals and metal goods (34.2%), chemicals (12.3%), along with electrical appliances and equipment (12%). Imports are dominated by fossil fuels, oil and oil products (54.8%, including natural gas 32.4%).11

The former Soviet republics remain Ukraine's the largest trade partners. Russia alone accounted for 43% of Ukrainian commodity exports and 52.3% of imports in 1995.12 In 1993 the "near abroad" accounted for 65.3% of Ukraine's exports and 76.9% of its imports, in 1994 55.8% and 65.7%, respectively. At the.same time, Ukraine's negative balance of trade dropped from $1,828 billion in 1993 to $1.2 billion in 1995.13 This tendency changed little in the first months of 1996: trade with the near abroad was $4,138 billion or 53.4%, with the "far abroad" $3.6 billion (46.6%).14

Note should also be taken of the fact that output continued to drop even in export-oriented sectors. This means that foreign economic activity of businesses, despite its growing scope, does not yet influence the dynamics of production.

In the period 1992-1995 Ukraine received $750 million in foreign investments, while, one expert estimates that Ukrainian industry can absorb annually $2-2.5 billion in foreign. investments.15 In addition, capital outflow from Ukraine in 1991-1995 has been estimated as high as $15 billion.16 This means the chances of modernizing production capacity with foreign technology and know-how are still slim.

The macroeconomic situation in Ukraine now largely depends on the scale of foreign funding. For example, the

1996 budget expects foreign loans to cover 44.3% of the of deficit.17 /366/

Ukraine's current financial capabilities directly depend on how it manages to reschedule its foreign debt. In 19941995 Ukraine, supported by international financial institutions, successfully negotiated a deferred payment schedule to its largest creditors, Russia and Turkmenistan. Moreover, it is only with funds from these institutions that Ukraine can pay for much of its critical imports. Yet, despite the crucial importance of foreign funding, no specific mechanisms of repaying Ukraine's foreign debt are being considered today.

These and other characteristics indicate that Ukraine is still in the condition of economic "drift" with unforeseen consequences to its statehood.

1 This classification is similar to the one suggested by John Dunning: John H. Dunning, "The Prospects for Foreign Directs Investment in /420/ Eastern Europe" in: Foreign Investment in Central and Eastern Europe, (New York, 1993), pp. 16-33.

2 Major components of each kind of economic policy are rather clearly, in our opinion, formulated in: Tibor Vasco, "A Global View: Types of Transformation Models" in: Reasearch Report. The Vienna Institute for Comparative Economic Studies, No. 206, May 1994.

3 Ukraine. EIU Country Report, 1st quarter 1995, p.31.

4 Ukraine. The Real Economy and Its Sectors: A Quarterly Statistical Abstract. The World Bank, (Kyiv, May 1996), VoL II, Issue 2, Table 1.1.

5 Uryadovy Kurier, Feb. 8, 1996.

6 Derzhavnyi Biuleten' pro Pryvatyzatsiyu, No. 2, 1996, p. 16 (in Ukrainian).

7 Ukraine. The Real Economy and Its Sectors, (Kyiv, May 1996), Vol. II, Issue 2, Fig. 2.4.

8 A.Volkov, "800 Trillion Squandered Karbovanets", Finansovaya Ukraina, Feb. 13, 1996 (in Russian).

9 A. Volkov, "Ukraine's Foreign Debt Is and Will Be Growing,". Finansovaya Ukraina, Jan. 30, 1996 (in Russian).

10 Uryadovy Kurier, June 29, 1996.

11 Uryadovy Kurier, Feb. 8, 1996.

12 Ibid.

13 The data are taken from: Ukraine. The Real Economy and Its Sectors: A Quarterly Statistical Abstract. The World Bank, (Kyiv, May 1996), Vol. II, Issue 2, Table 1.6.

14 The data are taken from: Uryadovy Kurier, June 29, 1996.

15 Roman Shpek, "Foreign Investments in Ukraine", Uryadovy Kurier, April 2, 19% (in Ukrainian).

16 V.Koshchiy, "Parallel Economic Worlds", Finansovaya Ukraina, Feb. 20, 1996 (in Russian).

17 Hobs Ukrainy, April 6, 1996.

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