A quarter century of economic reforms in Ukraine: too late, too little, too slow. Oleh Havrylyshyn

mBank – CASE SeminarsA QUARTER CENTURY

OF ECONOMIC REFORM IN UKRAINE:

TOO LATE, TOO LITTLE, TOO SLOW

18th December 2014

OUTLINE

I. INTRODUCTION AND MOTIVATION

II. THE “INPUTS” OF TRANSITION

III. REFORMS, POLICY CHANGES

IV. THE “OUTPUTS” OF TRANSITION: ECONOMIC AND SOCIAL PERFORMANCE

V. EXPLAINING URAINE’S LAG

VI. CONCLUSIONS

2

I. INTRODUCTION AND MOTIVATION

WELL-KNOWN FACT THAT UKRAINE LAGGED FAR BEHIND POLAND AND CEB

1ST AIM OF PAPER: TO DESCRIBE THE LAG, BOTH ON REFORMS (SEC.II) AND ON PERFORMANCE (SEC.III)

2ND AIM OF PAPER: TO INVESTIGATE CAUSES OF THE LAG (SEC.IV)

WHY REFORMS DEALYED, SLOW?

CORREALTIONS POINTING A THYPOTHEISI THAT DEALY IN EARLY YEARS BY ITSELF IMPORTANT EXPLANATION OF 25 yr. PERFORMANCE

3

FIGURE 1TRANSITION PROGRESS INDEX (TPI) –EBRD

4

FIGURE 2 SEQUENCE OF REFORMS

5

6

FIGURE 3INSTITUTIONAL ENVIRONMENT AMONG WORST

Business Environment

Latvia

Georgia

Ukraine

Lithuania

Armenia

Azerbaijan

Poland

Moldova

Russia

-200 -150 -100 -50 0 50 100 150 200

Ease of Doing Business 2011 (country ranking)

Index of Economic Freedom 2012 (country ranking)

50 100150200

Source: World Bank and Heritage Foundation.

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7

FIGURE 4 CORRUPTPTION RANKING AMONG WORST

0

20

40

60

80

100

120

140

160

Ukr

aine

Russi

a

Belar

us

Kaz

akhs

tan

Serbi

a

Latvi

a

Turke

y

Hun

gary

Polan

d

Source: Transparency International.2012

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FIGURE 5EXEPTION, DEMOCRACY IN UKRAINE, ONE OF BEST IN FSU

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III. ECONOMIC PERFORMANCE:

FIGURE 6 GDPpc $US

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CUMULATIVE FDI PER CAPITA TO 2012

ESTONIA… 11,177

CE.AVER… 5,671

POLAND… 4,334

ROMANIA 3,534

GEORGIA 2,224

FSUREF.AVER 1,878

UKRAINE 1,469

UZBEKISTAN 264

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FIGURE 7HUMAN DEVELOPMENT INDEX FOR SELECTED COUNTRY GROUPS

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…BUT STILL BETTER THAN IN SOVIET PERIOD

DESPITE LAGGING BEHIND CEB COUNTRIES, UKRAINE HAS PROGRESSED SIGNIFICANTLY FROM SOVIET TIMES

STANDARD OF LIVING IS HIGHER BY MOST DIRECT MEASURES OTHER THAN “OFFICIAL’’ GDP COMPARSIONS (AS IN EBRD REPORTS)BUT THESE ARE HIGHLY FLAWED, NMP BY FAR OVERESTIMATED REAL PRODUCTION AND CONSUMPTION

GLOBALISATION HAS GONE VERY FAR FROM AUTARKIC TRADE OF SOVIET TIMES; EXPORTS TO RUSSIA (25 %), EU (30%) ABOUT WHAT GRAVITY MODELS PREDICT

UKRAINE AND UKRAINIANS WIDELY RECOGNISED IN WORLD, AND AS DIFFERENT FROM RUSSIA

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UKRAINE REFORM DELAYS AND FAUSTIAN BARGAIN

RUKH AGREES FORMER COMUNISTS(KRAVCHUK) CAN GOVERN, DO ECONOMIC POLICIES, LATTER PROMISE TO SUPPORTINDEPENDENCE

INTEREST OF FORMER COMM. NOT QUICK REFORM, BUT DELAY, GIVE TIME TO BECOME NEW CAPITALISTS

INDEPENDENCE PROMISE KEPT AT COST OF SLOW REFORMS, START OF OLIGARCH CLASS, WANTS PRIVATE OWNERSHIP, BUT NOT COMPETITIVE MARKET

ONLY ONE OF ADAM SMITH’S INVISIBLE HANDS INSUFFICIENT TO PROMOTE PROSPERITY

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OLS REGRESSIONS: 25YRS GDP x TPILIB 1st 4URS

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0

0,5

1

1,5

2

2,5

3

0 0,5 1 1,5 2 2,5 3 3,5

ΔGDPl

ΔLIBs

TOWARDS A REFORM COMMITMENT MODEL

TRANSITION GROWTH LITERATURE LEAVES MANY OPEN QUESTIONS, DEBATE ON BB-INST CONTINUES

UKRAINE STORY HIGHLIGHT IMPORTANCE OF INCORPORATING DEGREE OF COMMITMENT TO REFORMS IN SOCIETY, BY LEADERS – CANNOT ASSUME STANDARD WELFARE THEORY THAT POLITICIANS WORK FOR PUBLIC GOOD

UKR STORY AND POLISCI LIT GIVES THE HINT: FIND A WAY OF PROXYING COMITMMENT, USE IV TECHNIQUES, SIMULTANEITY

ONE POSSIBILITY: A GOV THAT MOVES FAST ON STABILIZATION IS COMMITED TO LIBERALISATION AND TO INSTITUTIONS

A MODEL WITH COMMITMENT NEEDS TO BE DEVELOPED

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CONCLUSIONS 1

UKR. REFORM DELAY REFLECTS SELF – INTEREST OF NON-LUSTRATED FORMER COMMUNIST NOMEKLATURA

PUBLIC REASONS GIVEN:

WE DON’T KNOW HOW

SHOCK THERAPY WILL BE TOO PAINFUL

POPULATION NOT READY FOR MARKET

NEED TIME TO BUILD INSTITUTIONS

SINCERITY OF ABOVE VERY QUESTIONABLE, ESP. SINCE INSTITUIONS MOVED EVEN MORE SLOWLY THAN LIBERALISATION

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CONCLUSIONS 2

CASUAL EMPIRICISM (VARIOUS CHARTS SHOWN) POINTS VERY STRONGLY AT CORRELATION BETWEEN EARLY JUMP IN LIBERALISATION AND LONG-TERM PERFORMANCE

CONFIRMED BY CRUDE OLS REGRESSIONS BUT MUCH TOO WEAK TO BE CONVINCING

AFTER 25 YEARS HUGE AMOUNT OF DATA SHOULD ALLOW A MUCH MORE SOPHISTICATED TRANSITION MODEL WITH MANY VARIABLES-INCLUDING ONE TO CAPTURE POLITICS OF REFORM COMMITMENT-SIMULTANEITY, AND ADVANCE ECONOMETRIC TECHNIQUES

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DZYNKUE, BARDZO…&

WISHUKRAINIANS

SHCHASLYVO !18