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Ukraine at the Crossroads: Economic Reforms in International Perspective
Economic Systems 25 (2001) 275–285
Book reviews Ukraine at the Crossroads: Economic Reforms in International Perspective Siedenberg, A., Hoffmann, L. (Eds.); Physica, Heidelberg, 1999, xvi + 437 pp. Like most successor states of the former Soviet Union, Ukraine has attracted many advisors and projects to place it along the path towards using markets to guide economic decision-making. The Germany Advisory Group on Economic Reforms in the Ukraine Government was one of the first of these projects, and has had good access to the Ukrainian government. This book is a volume generated by a conference in Ukraine in 1998, in which much of the work of that project was presented along with papers from advisors from the International Monetary Fund, the World Bank and different European researchers. The conference took place before the re-election of President Leonid Kuchma in 1999, and reads much like a roadmap for the second Kuchma administration. As the title implies, Ukraine stands at a crossroads. Along one branch lies the market economy. But what lies along the other? The first article of this book, by John Odling-Smee and Ron van Rooden of the IMF, argues that the alternative is ever more government. Moreover, they argue, further delay is not desirable as waiting is to the advantage of those who desire statism. And financial pressures make delay impossible at any rate. The result of delay or of consciously taking the second branch “would further entrench those producer interests that resist competition and hard budget constraints, and result in stagnation” (p. 20). In 2000, Ukraine’s economy finally achieved growth of output for the first time since independence in December 1991. Given this dire forecast, one would expect the remainder of this book to be a recipe for how to make the leap to a market economy. And indeed there are a number of policy prescriptions ranging from macroeconomic and financial policy to agriculture and energy. What is noteworthy of these prescriptions, however, is that they propose to build Ukraine in Europe’s image of a regulated economy. That is not to say that economic concerns for efficiency are absent in this book. It is in this type of analysis that the book excels. In several places in Ukraine one can see the difficulty of removing the many regulations designed to assure that poor Ukrainians had access to electricity, gas, food, and housing. For example, in one excellent chapter on electricity price reforms by Volkhart Vincentz and Christian von Hirschhausen, the scope and magnitudes of various energy price subsidies are displayed. They show that imported gas continues to sell in the domestic market (for residential and state use) for less than its import cost from Russia. Coal continues to be more costly to extract in Ukraine than elsewhere in eastern Europe (though cheaper than in western Europe). The total subsidy for energy consumption was 1.6 billion hryvnia (about US$ 750 million), or 1.4% of GDP. 0939-3625/01/$ – see front matter © 2001 Elsevier Science B.V. All rights reserved.
276
Book reviews
In another chapter, Anneli Tübben explores the lack of foreign direct investment (FDI) in Ukraine. On a per capita basis, only Belarus has received less FDI than Ukraine. Tübben documents through survey research that the chief impediments to investment in Ukraine have been legal uncertainties and the lack of infrastructure improvements. The second is a chicken-and-egg sort of problem: Ukraine probably cannot improve its infrastructure without foreign investment, but foreign investment desires the infrastructure to be in place. But FDI in Ukraine has been always more about consumer goods than capital. Tübben shows that the most cited reasons for investment in Ukraine have been to secure potential sales markets or develop new ones. Both these types of FDI require foreign capital that is highly patient. But Ukraine has typically ranked very low in terms of friendliness to foreign investors. Its place in the Transparency International rankings of government corruption is lower than even most of the former Soviet Union. The problem stems chiefly from the presence of multiple bureaucracies, each extracting its own set of bribes and kickbacks. “Bureaucrats are no longer under the Communist Party’s control, and now they have practically no one to obey,” former Justice Minister and failed presidential candidate Serhiy Holovaty said in 1999. “With no means available for the society to control their decisions, the bureaucrats can easily use and divide state property to their liking.” In a frank moment, Ukrainian president Leonid Kuchma conceded, “Under such circumstances, who would want to deal with us?” (Luhovyk, 1999). Part of the problem for Ukraine, however, is that without growth, competition between bureaucrats and disagreements over energy subsidies are centered on a shrinking volume of production. As Alex Sundakov points out in another paper in this book, government strategy has been hampered by the almost constant state of crisis in the Ukrainian economy. Hyperinflation in 1993 headed the economy into steep decline — while it may be true that one needs a crisis of production to undertake long-lasting economic transformation, as Sundakov argues, more pragmatic concerns for short-run stabilization can dominate the political landscape. Ukraine then could not avoid some of the aftermath of the Asian and Russian crises of the late 1990s, which placed its new currency on such shaky footing that its strategy of an exchange-rate-based stabilization was shelved. Tight money, however, has meant deterioration of its shaky banking sector, as Daniel Gros and Alfred Steinherr illustrate in their chapter. In each of these cases, the book moves crisply through a good amount of data, providing insight into the specific problems of current Ukrainian economic policy. When it is time to provide answers, however, the reforms called for a restructuring of state policies that leaves the power in the hands of these very bureaucrats. There is pressure for privatization, but that pressure comes largely from external lenders to help close gaps in state budgetary finances. When privatization is undertaken for this purpose, there is no incentive to consider whether the plan encourages long-run efficiency gains. This is most clearly seen in the privatization of agriculture in Ukraine, where agricultural managers struggle under several state mandates that prevent making farms profitable. In the book under review, Ulrich Koester and Ludwig Striewe argue for a farm privatization that really does place farms in the free market. But this viewpoint does not carry in other parts of the book. While deploring the high volume of subsidies, the book’s contributors only call for a careful accounting rather than elimination. A chapter on comparisons between Ukrainian electricity markets and the deregulation of the English and Welsh electricity markets does not fully embrace deregulation.
Book reviews
277
Rather than replace the pay-as-you-go pension system with a fully funded scheme (such as Chile in the early 1980s), privatized pensions are only seen as a complement. It is relatively clear that the book ideally envisions Ukraine as a member of the European Union, replete with its social, agricultural and economic mandates, rather than emulating an Anglo-American model. While all of these reforms claim to be market-based, each of them still leaves the state as an important guide to industry for what will be efficient. For this to occur, radical change in the leadership of the country would be needed, as it seems unlikely the current regime could provide the type of rudder a western European managed economy requires. Ukraine, quite clearly, was not an early reformer. A chapter by Oleh Havrylyshyn, Ivailo Izvorski and Ron van Rooden adds to a substantial body of evidence that economic performance has been better for those countries that undertook stabilization, price liberalization, and privatization quickly. The problem remains, however, what we are to do now for those countries that did not. The authors argue that structural reforms must be accelerated. But we know that the political calculus for undertaking reforms was strongest at the outset, and that the crisis of hyperinflation was not sufficient to induce the government to take on these measures. If not then, what makes anyone hopeful that they will begin now? This book is short of answers to that problem, which puts the contributors in good company: nobody seems to have the answer. Reference Luhovyk, V., 1999. In Ukraine, It’s Every Bureaucrat for Himself, Associated Press, May 18.
King Banaian Department of Economics, St. Cloud State University, St. Cloud, MN 56301, USA E-mail address: [email protected] (K. Banaian) PII: S 0 9 3 9 - 3 6 2 5 ( 0 1 ) 0 0 0 2 2 - X
The Soft Budget Constraint: The Emergence, Persistence and Logic of an Institution Gun E. Skoog, Kluwer Academic Publishers, Boston, Dordrecht, London, 2000, 416 pp. In 1998, János Kornai wrote that the soft budget constraint syndrome was more likely in countries where politics and business were intertwined and where a large state sector co-existed with an all-pervasive bureaucracy (Kornai, 1998). Aside from its prevalence in socialist countries and less so in the so-called transition countries, his conclusion was that the soft budget constraint was quite common in developing countries. Gun Eriksson Skoog’s book is a testament to this claim. Although Skoog refers to three fields of economic inquiry where a contribution is aspired to, namely, developments in the Tanzanian economy, institutional analysis and the soft budget constraint, this review is less ambitious and examines only one of these, that is, the subject matter of the book — the soft budget constraint (hereafter referred to as the SBC). Immediately, one is faced with the same dilemma as that which confronted the author, namely, the meaning of the SBC. Since its appearance in the economics literature over
Book reviews Ukraine at the Crossroads: Economic Reforms in International Perspective Siedenberg, A., Hoffmann, L. (Eds.); Physica, Heidelberg, 1999, xvi + 437 pp. Like most successor states of the former Soviet Union, Ukraine has attracted many advisors and projects to place it along the path towards using markets to guide economic decision-making. The Germany Advisory Group on Economic Reforms in the Ukraine Government was one of the first of these projects, and has had good access to the Ukrainian government. This book is a volume generated by a conference in Ukraine in 1998, in which much of the work of that project was presented along with papers from advisors from the International Monetary Fund, the World Bank and different European researchers. The conference took place before the re-election of President Leonid Kuchma in 1999, and reads much like a roadmap for the second Kuchma administration. As the title implies, Ukraine stands at a crossroads. Along one branch lies the market economy. But what lies along the other? The first article of this book, by John Odling-Smee and Ron van Rooden of the IMF, argues that the alternative is ever more government. Moreover, they argue, further delay is not desirable as waiting is to the advantage of those who desire statism. And financial pressures make delay impossible at any rate. The result of delay or of consciously taking the second branch “would further entrench those producer interests that resist competition and hard budget constraints, and result in stagnation” (p. 20). In 2000, Ukraine’s economy finally achieved growth of output for the first time since independence in December 1991. Given this dire forecast, one would expect the remainder of this book to be a recipe for how to make the leap to a market economy. And indeed there are a number of policy prescriptions ranging from macroeconomic and financial policy to agriculture and energy. What is noteworthy of these prescriptions, however, is that they propose to build Ukraine in Europe’s image of a regulated economy. That is not to say that economic concerns for efficiency are absent in this book. It is in this type of analysis that the book excels. In several places in Ukraine one can see the difficulty of removing the many regulations designed to assure that poor Ukrainians had access to electricity, gas, food, and housing. For example, in one excellent chapter on electricity price reforms by Volkhart Vincentz and Christian von Hirschhausen, the scope and magnitudes of various energy price subsidies are displayed. They show that imported gas continues to sell in the domestic market (for residential and state use) for less than its import cost from Russia. Coal continues to be more costly to extract in Ukraine than elsewhere in eastern Europe (though cheaper than in western Europe). The total subsidy for energy consumption was 1.6 billion hryvnia (about US$ 750 million), or 1.4% of GDP. 0939-3625/01/$ – see front matter © 2001 Elsevier Science B.V. All rights reserved.
276
Book reviews
In another chapter, Anneli Tübben explores the lack of foreign direct investment (FDI) in Ukraine. On a per capita basis, only Belarus has received less FDI than Ukraine. Tübben documents through survey research that the chief impediments to investment in Ukraine have been legal uncertainties and the lack of infrastructure improvements. The second is a chicken-and-egg sort of problem: Ukraine probably cannot improve its infrastructure without foreign investment, but foreign investment desires the infrastructure to be in place. But FDI in Ukraine has been always more about consumer goods than capital. Tübben shows that the most cited reasons for investment in Ukraine have been to secure potential sales markets or develop new ones. Both these types of FDI require foreign capital that is highly patient. But Ukraine has typically ranked very low in terms of friendliness to foreign investors. Its place in the Transparency International rankings of government corruption is lower than even most of the former Soviet Union. The problem stems chiefly from the presence of multiple bureaucracies, each extracting its own set of bribes and kickbacks. “Bureaucrats are no longer under the Communist Party’s control, and now they have practically no one to obey,” former Justice Minister and failed presidential candidate Serhiy Holovaty said in 1999. “With no means available for the society to control their decisions, the bureaucrats can easily use and divide state property to their liking.” In a frank moment, Ukrainian president Leonid Kuchma conceded, “Under such circumstances, who would want to deal with us?” (Luhovyk, 1999). Part of the problem for Ukraine, however, is that without growth, competition between bureaucrats and disagreements over energy subsidies are centered on a shrinking volume of production. As Alex Sundakov points out in another paper in this book, government strategy has been hampered by the almost constant state of crisis in the Ukrainian economy. Hyperinflation in 1993 headed the economy into steep decline — while it may be true that one needs a crisis of production to undertake long-lasting economic transformation, as Sundakov argues, more pragmatic concerns for short-run stabilization can dominate the political landscape. Ukraine then could not avoid some of the aftermath of the Asian and Russian crises of the late 1990s, which placed its new currency on such shaky footing that its strategy of an exchange-rate-based stabilization was shelved. Tight money, however, has meant deterioration of its shaky banking sector, as Daniel Gros and Alfred Steinherr illustrate in their chapter. In each of these cases, the book moves crisply through a good amount of data, providing insight into the specific problems of current Ukrainian economic policy. When it is time to provide answers, however, the reforms called for a restructuring of state policies that leaves the power in the hands of these very bureaucrats. There is pressure for privatization, but that pressure comes largely from external lenders to help close gaps in state budgetary finances. When privatization is undertaken for this purpose, there is no incentive to consider whether the plan encourages long-run efficiency gains. This is most clearly seen in the privatization of agriculture in Ukraine, where agricultural managers struggle under several state mandates that prevent making farms profitable. In the book under review, Ulrich Koester and Ludwig Striewe argue for a farm privatization that really does place farms in the free market. But this viewpoint does not carry in other parts of the book. While deploring the high volume of subsidies, the book’s contributors only call for a careful accounting rather than elimination. A chapter on comparisons between Ukrainian electricity markets and the deregulation of the English and Welsh electricity markets does not fully embrace deregulation.
Book reviews
277
Rather than replace the pay-as-you-go pension system with a fully funded scheme (such as Chile in the early 1980s), privatized pensions are only seen as a complement. It is relatively clear that the book ideally envisions Ukraine as a member of the European Union, replete with its social, agricultural and economic mandates, rather than emulating an Anglo-American model. While all of these reforms claim to be market-based, each of them still leaves the state as an important guide to industry for what will be efficient. For this to occur, radical change in the leadership of the country would be needed, as it seems unlikely the current regime could provide the type of rudder a western European managed economy requires. Ukraine, quite clearly, was not an early reformer. A chapter by Oleh Havrylyshyn, Ivailo Izvorski and Ron van Rooden adds to a substantial body of evidence that economic performance has been better for those countries that undertook stabilization, price liberalization, and privatization quickly. The problem remains, however, what we are to do now for those countries that did not. The authors argue that structural reforms must be accelerated. But we know that the political calculus for undertaking reforms was strongest at the outset, and that the crisis of hyperinflation was not sufficient to induce the government to take on these measures. If not then, what makes anyone hopeful that they will begin now? This book is short of answers to that problem, which puts the contributors in good company: nobody seems to have the answer. Reference Luhovyk, V., 1999. In Ukraine, It’s Every Bureaucrat for Himself, Associated Press, May 18.
King Banaian Department of Economics, St. Cloud State University, St. Cloud, MN 56301, USA E-mail address: [email protected] (K. Banaian) PII: S 0 9 3 9 - 3 6 2 5 ( 0 1 ) 0 0 0 2 2 - X
The Soft Budget Constraint: The Emergence, Persistence and Logic of an Institution Gun E. Skoog, Kluwer Academic Publishers, Boston, Dordrecht, London, 2000, 416 pp. In 1998, János Kornai wrote that the soft budget constraint syndrome was more likely in countries where politics and business were intertwined and where a large state sector co-existed with an all-pervasive bureaucracy (Kornai, 1998). Aside from its prevalence in socialist countries and less so in the so-called transition countries, his conclusion was that the soft budget constraint was quite common in developing countries. Gun Eriksson Skoog’s book is a testament to this claim. Although Skoog refers to three fields of economic inquiry where a contribution is aspired to, namely, developments in the Tanzanian economy, institutional analysis and the soft budget constraint, this review is less ambitious and examines only one of these, that is, the subject matter of the book — the soft budget constraint (hereafter referred to as the SBC). Immediately, one is faced with the same dilemma as that which confronted the author, namely, the meaning of the SBC. Since its appearance in the economics literature over