HruskUkraine - Adrian Hruszkewycz 3-8-05 The Transitional...

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Adrian Hruszkewycz 3-8-05 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. Each country 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. Structural reforms 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 possible. Ukraine took a gradual path, slowly taking each step. Ukraine has been one of the slowest of the transition economies to implement reform. 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. HYPERINFLATION During the Cold War, about 25% of Ukrainian companies produced military goods (7). 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
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This note was uploaded on 07/17/2008 for the course ECON 508 taught by Professor Fleisher during the Winter '06 term at Ohio State.

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HruskUkraine - Adrian Hruszkewycz 3-8-05 The Transitional...

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