Economic Development in Ukraine (by Alastair Nicolson)

 What a complex picture. Official statistics suggest very low levels of economic output, and correspondingly GDP per capita levels are amongst the lowest in the developed world. Received wisdom suggests ‘the majority within the new ruling elite has contempt for productive activity and is interested only in booty…’ But this country used to be the Breadbasket of the Soviet empire, has some of the largest steel mills in the world and provided much of the intellectual capital that developed the Soviet space programme. What is happening behind the scenes??

Looking at proxy indicators rather than ‘official’ statistics, a very different picture emerges. Firstly, on visiting the capital, Kyiv. It doesn’t ‘feel’ like a poor city. There is a sense of growing affluence and plenty of cranes on the skyline to suggest new wealth has reached more than just the richest people. There were 68 passenger cars per 1,000 population in 1990, 98 cars by 1998 and in 2005 there were 165 cars for every 1,000 people. Another useful proxy indicator for economic growth is electricity consumption – which in Ukraine has, along with car ownership, continued to grow much more rapidly than the GDP statistics suggest. Finally, household surveys suggest as much as 30% of the workforce work for ‘new’ firms – many of which never register with the government.

This evidence all suggests that there is a very large ‘shadow’ economy operating within the country, and some experts believe it could be as much as half as big as the official economy.

These new small firms are primarily servicing domestic demand. A consumer society is rapidly emerging, and in a country with a population of almost 50 million it has considerable scope for expansion. However, while the ‘invisible hand’ is quite capable of bringing suppliers and consumers together in the market place, there is no sign of a corresponding ‘guiding hand’ of regulation and control to ensure that all things from health and safety in the workplace to environmental impact of production processes are addressed in the way we might expect from a developed economy.

The very impressive growth that can be seen today – estimated to be driving up real incomes by as much as 20% per annum (in real terms) will be constrained by the (current) capacity of the economy. In addition to free markets and free movement of people, goods and services, the fundamental requirements for long term economic growth include establishment of property rights and enforcement of the rule of law. While the lack of property rights may not constrain the growth of small, domestic firms, it will most certainly slow the rate at which FDI enters the country. Of more concern, however, is the failure to enforce the rule of law. Such a constraint will ensure that the playing field is never level for very long, and the social and environment impact of development is not taken into account.

The other obvious constraint of an economy that is growing rapidly ‘despite’ the system is the lack of strategic planning. The rapid rate of growth will lead to considerable rural – urban migration (as wage differentials in emerging sectors of the economy compared to traditional sectors begin to pull people into the cities) which requires significant and well thought out infrastructural investment. This will be in the form of roads, housing, industrial areas, railways, electricity generation, water and sewerage etc. Lack of planning and investment in these areas will slow down the rate of growth and lead to some sub-optimal decision-making.

In summary, I think that the rapid rate of growth the economy is currently experiencing is driven by a talented workforce which is becoming aware of the size of the internal market it has at its disposal. However, in order for this country to realise its full potential, political reforms, an injection of strategic planning and legislative changes to ensure the enforcement of the rule of law will need to be taken forward in early course.

Written by Alastair Nicolson

Comments

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A consumer society is rapidly emerging, and in a country with a population of almost 50 million it has considerable scope for expansion. That's a good news!

Ben Cliff