Russian and Ukrainian Transition in Comparative Perspective

1
Russian and Ukrainian Transition in Comparative
Perspective
2
The Context Similarities and Differences

• Similarities
• Cultural, historical, institutional
• Initial conditions of transition
• Trends in economic policy and reform

• Differences
• Oil and gas reserves
• Geographic advantages for Ukraine
• Tradition of government Weaker in Ukraine

3
Similarities in macroeconomic performance

• Early 90s sharp industrial decline, high
  inflation, instability.
• Limited progress in stabilization interrupted by
  1998 financial crisis.
• Demonetized virtual economy in the latter
  1990s.
• Rapid growth, monetization, and other positive
  trends since 2000 (growth slowing in 2002 and
  accelerating in 2003).

4
(No Transcript)
5
Similarities in economic policy and reform

• Early 1990s Quasi-fiscal subsidies through the
  banking sector and state budget.
• Mid-1990s Quasi-fiscal subsidies shifted to
  energy and state budget (deficits).
• Majority of state assets privatized by latter
  1990s
• Major campaigns to eliminate budget deficits and
  money surrogates in 2000, followed by other
  significant measures to improve budgetary and tax
  systems.
• Recent monetary policy based on implicit exchange
  rate targeting to the dollar.

6
Similarities in institutional development

• Increasing concentration of activity in
  financial-industrial groups
• Entrenched insider control during most of the
  1990s, followed by the rapid emergence and growth
  of a market for corporate control and increasing
  outside ownership
• High managerial turnover since late 1990s
• Demonetization in the late 1990s followed by very
  rapid monetization
• Rapid growth in commercial banking and credit
• Acceleration in restructuring
• Growing competition (including competition
  between FIGs)

7
(No Transcript)
8
(No Transcript)
9
(No Transcript)
10
(No Transcript)
11
(No Transcript)
12
(No Transcript)
13
(No Transcript)
14
(No Transcript)
15
What is the source of such strong similarities
in Russian and Ukrainian Economic Performance?

• Hypothesis 1 Ukraine remains so highly
  integrated with Russia that its economic
  performance simply mirrors that of its larger
  neighbor.
• Hypothesis 2 External factors for both
  countries have been similar growth since 2000
  explained by depreciated currency, excess
  capacity, and high commodity prices for exports
• Hypothesis 3 Similar initial conditions,
  policies, and reforms. Along with favorable
  external factors, recent growth reflects policy
  changes that improved economic incentives and
  facilitated institutional development in both
  countries

16
Evidence for hypothesis 1 is rather weak

• Trade volume between Ukraine and Russia recovered
  in 2000, but did not grow very fast from
  2001-2003.
• Capital inflows to Ukraine have been quite small.
• Russian subsidies to Ukraine have diminished
  significantly.
• Remittances of Ukrainian workers from Russia have
  been significant, but still of limited impact.

17
(No Transcript)
18
(No Transcript)
19
(No Transcript)
20
Evidence for hypothesis 2 is stronger

• Recent growth in both countries in export and
  import-substituting industries.
• Slowdown in growth associated with rising costs
  (real appreciation) and rising marginal costs
  (diminishing excess capacity).
• Acceleration since 2003 linked to much higher
  commodity prices.
• Yet growth in Ukraine from 2001-2003 was not
  export-led.

21
(No Transcript)
22
The evidence for Hypothesis 3 is also strong

• Surveys indicate a fundamental change in
  the incentives and orientation of firms and
  managers.
• From macro-stabilization.
• From changes in the allocation of explicit and
  implicit state subsidies.
• From the imposition of financial discipline.
• From improvements in the tax system.
• Less favoritism of particular business groups.
• From an overall policy commitment to the
  development of markets, re-enforced by
  institutional changes.

23
Challenges for the sustainability of growth

• Measures to combat the insider economy and
  encourage financial-industrial groups to come
  clean.
• Problems in government administration and
  interbudgetary relations.
• Competitiveness and restructuring
• Vulnerability to external shocks
  (Diversification)
• Holding the course on basic reform strategy

24
(No Transcript)