As the Ukrainian economy goes beyond its stabilization phase and toward a comprehensive program of structural reform, articulating a full macroeconomic scenario for the medium term becomes increasingly important. Such a scenario is not an unconditional forecast of the most likely evolution of the economy over the coming years. Indeed, the medium-term scenario will be very much predicated upon a set of often difficult, if not painful, micro- and macroeconomic adjustment policies. Nor, given existing data constraints, is it possible to generate a true conditional forecast (together with associated standard errors). Rather, the medium-term scenario is intended to provide a simple macroeconomic “reality check” upon projections for economic targets such as output growth and inflation. For example, generating rapid economic growth would be relatively simple if the country were willing to undertake sufficient investment. But achieving such an investment rate might entail unacceptable declines in consumption, or an unsustainably large buildup of external debt. Thus the challenge in developing a medium-term scenario lies in choosing reasonable macroeconomic targets that can be attained under plausible assumptions about the private sector’s behavior and the government’s willingness to undertake the necessary policy measures.
Since its declaration of independence in August of 1991, Ukraine has embarked on the highly complex task of severing its ties with the Moscow-dominated centralized economy, and erecting a market economy in its place. The economic reform effort in Ukraine is only about two years old. Not until the election of President Kuchma in mid-1994 was a comprehensive program of stabilization, liberalization of trade and prices, and privatization started by the government. It is clear that an efficient private sector is essential to sustain this reform program. Moreover, experience in Eastern Europe has shown that the restoration of economic growth will only come about through the new private sector. Hence, Ukraine’s structural reform agenda stresses the importance of an enabling business environment. A transparent legal framework that secures property rights and provides credible and efficient mechanisms for enforcement of contracts is a clear precondition for such an environment.
The food and agricultural sector has greater economic potential in Ukraine than in any other country of the former USSR. This potential is due primarily to the country’s favorable agro-climatic conditions, which are well suited not only to the production of grains, oilseeds, root and fiber crops, and livestock but also to the cultivation of a wide variety of temperate fruits and vegetables. Comparisons of historical data prior to reform (the late 1980s through 1991) indicate that Ukraine was the lowest-cost producer in Central Europe and the former USSR for wheat, corn, sunflower seeds, and sugarbeets. Evaluating Ukrainian costs of production for these commodities, using world market prices for the material inputs, shows that Ukraine’s greatest absolute advantages are in wheat and sunflowers, while corn and sugarbeet costs are still below average costs in most other major producing countries.
In the period 1991–95, state ownership of assets and direct control over their use were the main vehicles for the implementation of energy policy in Ukraine. Energy sector enterprises were not allowed to determine their own production, investment, pricing, and marketing strategies. A system of administratively controlled energy prices was intended to guarantee social justice. Differences between energy prices and supply costs were covered by: (1) the budget, in the form of price subsidies and investment grants; (2) external fuel suppliers, in the form of uncollected receivables and long-term credit; (3) the domestic banking sector in the form of subsidized credit for working capital and investments; and (4) the energy suppliers themselves, in the form of postponed maintenance and rehabilitation expenditures. In addition to the wasteful consumption of fuel and energy resources, the respective consequences were (1) growth of the budget deficit (at the beginning of the period) and the need to impose additional taxes on the economy (toward the end of the period); (2) rapid accumulation of internal and external debt and payment obligations; (3) below-market interest payments by the banking sector to depositors and the crowding out of credit to other sectors of the economy; and (4) deterioration of the quality and reliability of fuel and energy supply.
Ukraine has made considerable progress in introducing key elements of a liberal trade regime since gaining independence in 1991. Many of the quantitative restrictions on exports that distorted trading and were designed to isolate the domestic economy from world markets have been dismantled, although some vestiges of this system remain. The import regime remains relatively liberal and trade-weighted average tariffs are quite low at 5 percent. Most tariff rates are below 30 percent. However, the government has acted in recent months to increase protection for certain industries through selective increases in import tariffs and export duties. This paper reviews recent developments in Ukraine’s trade policy and trade patterns, and then proposes policies for medium-term reform aimed at maintaining and enhancing Ukraine’s openness to trade.
Governance is a broad concept. The American Heritage Dictionary (1991) defines it as the process of “making and administering the public policy,” while Webster’s Dictionary (1991) equates it simply with government. On the other hand, the World Bank’s definition of governance is more revealing. For the Bank, governance is “the manner in which power is exercised in the management of a country’s economic and social resources for development” (World Bank, 1992, 1994). Obviously, this definition implies that power can be exercised badly. The transition can be defined as a process by which countries transit from an environment of central planning to one in which market forces prevail. In a fundamental sense, the challenges of transition are challenges of governance.
The King shall protect trade routes from harassment by courtiers, state officials, thieves and frontier guards and from being damaged by herds of cattle…. Frontier officers shall be responsible for the safety of the merchandise passing on the roads and shall make good what is lost….
The key function of the political process is to resolve conflicts of interest—between various groups of voters, between consumers of government services and the taxpayers, between short-term and medium-term objectives, and so on. How these choices are made depends in part on the political actors involved. More important, however, is that the choices are fundamentally influenced by how the governing institutions are organized. There is increasing recognition in literature, as well as in practical applications, that good institutions produce good policies. For example, in many countries, achievement of sustainable low inflation is credited to the establishment of the institutional independence of the central bank. The corollary is that inappropriate fiscal and monetary policies are frequently produced by state institutions unsuitable to the task of reconciling competing claims on the public purse explicitly. Inflation is then required to do what government institutions cannot achieve.