The Transitional Experience of Ukraine
Upon the collapse of communism in Eastern Europe and the Soviet Union in
1991, some 25 countries suddenly found themselves independent.
approached freedom with its own circumstances and each adopted its own transitional
policies to varying degrees of success.
Ukraine emerged as Europe’s second largest
landmass and fourth largest population with 50,000,000 people.
Once deemed the
“breadbasket of Europe” for its rich land and once a technological powerhouse during the
cold war, Ukraine has had a difficult time adjusting to market economics and breaking its
traditional communist ideals.
Several key reforms face a country on its pursuit of becoming a market economy.
Macroeconomic reforms necessary include price liberalization, balancing of the
government budget, a restrictive monetary policy to restore a positive interest rate, an
income policy to combat inflation, and foreign trade liberalization.
include initiation privatization, reform of the banking and financial sector, development
of a social safety net, and restructuring industry to run more efficiently (5, p.114-117).
The order in which these reforms were implemented varied among transitional economies
and was often politically driven to establish credibility.
Countries such as Russia,
Czechoslovakia, and Poland adopted shock therapy and attempted to reform as quickly as
Ukraine took a gradual path, slowly taking each step.
Ukraine has been one of the slowest of the transition economies to implement
For the first three years of independence, price liberalization was virtually the
only reform made.
Prices of goods and utilities soared in the new market and when
coupled with the rapidly increasing inflation, many people quickly saw their life savings
reduced to nothing.
Real wages dropped an estimated 63% while income tax levels
reached 50% between 1990 and 1993 and the demand for labor decreased when prices of
goods and the cost of labor increased (11).
Figure 1 demonstrates the dramatic economic
decline experienced in Ukraine and Figure 2 compares Ukraine’s GDP growth relative to
Russia and Poland.
These indicate that the Ukrainian economy suffered for several years
following its freedom, but has since begun to grow again. The most significant factors in
Ukraine’s transition have been monetary stabilization, privatization, and financial sector
reform and will be the focus of this paper.
During the Cold War, about 25% of Ukrainian companies produced military
Immediately after the collapse of the Soviet Union, Ukraine had the highest
share of large-scale industrial enterprises among CIS countries and was second only to
Russia in terms of per capita industrial production.
This enormous dependence on
inefficient and energy intensive industrial and military output made the Ukrainian
economy very vulnerable during its transition (1).
After the collapse of the Soviet Union, the Cold War abruptly ended, dramatically