Transcript Event Slides - Carnegie Endowment for International Peace

The underachiever:
Ukraine’s economy since 1991
Pekka Sutela
Carnegie Endowment
27 January 2012
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Track record
• Ukraine has grown with the region
– Was in 1990 one of the poorest of Soviet republics
and has remained in a similar position: no catching up,
no lagging behind
• Growth in 2011 (>4%) and expectation for 2012
(<4%) essentially identical with Russia
• Inflation in 2011 higher than in Russia, and
expected to remain so
• The 2012 Index of Economic Freedom: 163/183
countries, lowest in the European region
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Issues for 2012
• Foreign trade and payments
– Current account deficit 8.75 BUSD in 2011:1-11 (2.13 BUSD in
2010)
– Capital outflow due to European financial regression
– Servicing 8.2 BUSD of public and >50 BUSD (est.) of total debt
• Government bonds (maturing 2117) yield 6.9 in 2011:7, 10.9 in
2012:1
• Official reserves 38.2 BUSD in 2011:8, 30.4 BUSD in 2011:12
• Fiscal affairs
– Headline budget deficit 4.3%/GDP, more in state banks and
companies
– Exceptionally large pension burden with declining and greying
population
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• Gas
– Import price 400 USD in 2011:IV, according to
contract 416 USD in 2012:1 (without Kharkiv
discount?). Ukraine aims at 250 USD (with
discount?)
– Less transit revenue due to Nord Stream
– European buyers demanding and getting price
discounts: puts also pressure on transit fees
– Ukraine claims to be able to decrease gas imports
from 40 Bm3 in 2011 to 27 Bm3. From gas to coal?
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World Bank’s Doing Business 2011:
Kazakhstan, Russia and Ukraine
(out
of
183)
Kazakhstan
Russia
UKRAINE
Altogether
59
123
145
Starting a business
47
108
118
Dealing with
construction
permits
147
182
179
Registering
property
28
51
164
Getting credit
72
89
32
Protecting investors 44
93
109
Paying taxes
39
105
181
Trading across
borders
181
162
139
Enforcing contracts
36
18
43
Closing a business
48
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150
5
Ukraine / IMF situation
• Press briefing yesterday: ”an active dialogue
through technical teams in the period ahead”
• No timeline
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Three questions
• Why is such a badly functioning economy able
to grow as fast as others in peer group on
average?
• Why is Ukraine such a badly functioning
economy?
• Is the combination of bad functioning and
average growth a vicious circle?
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(1) Why is such a badly functioning
economy able to grow as fast as others
in peer group on average?
• We do not really know how fast countries have been
growing
– General problems in changing statistics from Soviet ones to
market based
– True depth of decline in the 1990s unclear, due to high
inflation, change in price relations and structural change
– Estimating the true size of shadow economy difficult ,
especially large in Ukraine
• Steep decline in GDP provides for fast recovery growth
– probably
• Neither are the others in peer group well-functioning
– But Ukraine seems to be the worst on these indicators
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• Perhaps Ukraine inherited better capital stock,
infrastructure?
– Possible, due to post-war reconstruction
– But Ukraine not better in infrastructure and general
industry reform (EBRD Sector Transition Indicators
2011)
• Then, Russia and Kazakhstan are resource rich,
Ukraine resource wealthy
– Russia has Resource Curse, no Dutch Disease
– How about Ukraine?
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The Ukrainian Curse
• In the 2000s Ukraine’s terms of trade improved by 50%
– Unit values of exports (metals, metallurgy, petrochemicals)
rose with fast global growth
– Prices of energy exports from Russia (gas!) remained low
– This created a rent division game with need of access to
state resources and corruption
– Privatization to domestic owners (oligarchs); little access
by outsiders including Russians
• Logistics as another source of rents
– Pipelines, railways, roads, harbors
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The windfall is not sustainable
• By 2006 Russian leadership had concluded that the country
could not develop on resources
– Very slow growth of oil and gas production
– GDP expected to grow faster due to structural change, financial
deepening etc
– Maintaining export volumes only possible with improved energy
efficiency, which demands higher prices and much more
(modernization)
– Jobs could therefore no longer be subsidized through low
energy prices. Much wider competitiveness (diversification)
needed
• The economic reasons for gas price disputes do not exclude
political ones. But why give Ukraine priority access to raw
materials and logistics windfalls?
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Ukraine aiming at best of both worlds:
the grey zone
• Export markets are in Europe and Asia
– Ukraine does export high-value goods also, but only ones
produced in Soviet-time plants, and in small volumes: no real
diversification
– Collapse of machinery exports to FSU has made exports more
one-sided and lower value-added
– Agri-business an argument for free trade with EU
– Few incentives to adopt acquis as no membership perspective
available. Motivation for ”free and comprehensive free trade”at
best unclear
• Import markets are in Russia. How to combine
– National independence
– Access to cheap raw materials and logistics windfall
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(2) Why is Ukraine such a badly
functioning economy?
• Modern economics says
– Long past institutions and culture have an impact on modern
performance
• Lack of individualism
• Impact of different empires, with Russia as the dominant one
• Tragic 20th century
– Battle field of world and civil wars
– Stalinism, collectivization, holocaust, forced population movements
– From internationalism to Soviet closedness
• Peculiarities of the 1990s
– Nation building over structural reforms
– Free room for asset-grabbing
• The Ukrainian Curse
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(3) How can the circle be broken?
• Only the Ukrainians can do it
• There is no lack of reform blueprints
• Political will does not exist
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