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King Banaian, The Ukrainian Economy Since Independence
Journal of Comparative Economics 29, 190–192 (2001) doi:10.1006/jcec.2000.1675, available online at http://www.idealibrary.com on
King Banaian, The Ukrainian Economy Since Independence. Northampton, MA: Edward Elgar, 1999. x + 173 pp., index, $70.00. As the title indicates, the book is about Ukraine’s economic performance from 1991, when it gained independence, to 1999. The book provides a chronological overview of major developments in Ukraine’s economy and society and, at the same time, analyzes the evolution of its growth and other macroeconomic indicators. This combination of descriptive and analytical approaches to the topic is fruitful. The presence of such an analytical component distinguishes this book from a similar earlier publication, Ukraine’s Economic Reform: Obstacles, Errors, Lessons, by Raphael Shen (Westport, CT: Praeger, 1996). Shen’s book is based on interviews with Ukrainian economists, statisticians, and government officials, so that it relies on their views. Banaian, on the other hand, spent a year between 1995 and 1996 working as a U.S. AID macroeconomic advisor to the National Bank of Ukraine; as a result, he was able to collect first-hand information and draw conclusions based on his own observations. The central theme of the book is best characterized as an assessment of three goals of transition, i.e., stabilization, liberalization, and privatization, specified by Banaian, and much of the book’s discussion is focused on the successes and failures of their implementation in Ukraine. He pays significant attention to hyperinflation in Ukraine in 1992–1993 when consumer prices rose by an average 40% per month. Banaian gives three reasons: lack of a capital market, decline of tax revenue, and reliance on seigniorage, i.e., printing money (pp. 31–40). Each of the reasons is well articulated and supported by documented data, in particular money supply, seigniorage revenues, and taxes. However, all former Soviet Union (FSU) countries experienced similar problems; yet inflation rates were much lower in most of them, including Russia, than in Ukraine. Moreover, some of the aforementioned reasons, e.g., decline of tax revenues, could in turn be caused by other developments. As usual, many Ukrainians blame outsiders, e.g., the United States, the IMF, and of course Russia. To others, it is evident that their leadership put the cart in front of the horse by liberalizing prices prior to privatization. Being industrialized turned out to be a liability for Ukraine since its industry could no longer compete after the opening of the economy. Two quite interesting topics, whose coverage benefited from Banaian’s activity in Ukraine, are the performance of the National Bank of Ukraine and the saga of the introduction of the national currency, the hryvnia. As in any developing
0147-5967/01 $35.00 C 2001 by Academic Press Copyright ° All rights of reproduction in any form reserved.
190
BOOK REVIEWS
191
country, the exchange rate affects standards of living in Ukraine, and its people, from school students to pensioners, take interest in it on a daily basis. Banaian uses an econometric model to estimate the exchange rate and the effect on it of obligatory sales of a part of firms’ foreign currency earnings back to the NBU (pp. 108–115). These sales tend to push the exchange rate down, i.e., appreciate the hryvnia, much to the dismay of exporters and satisfaction of ordinary people. A student in the field of transition will also appreciate Banaian’s using econometric models to analyze the prospects for economic growth in Ukraine. He estimates production functions, growth, and productivity for the economy and five of its sectors: industry, agriculture, construction, transport and communications, and trade and procurement (pp. 144–150). His finding that “the decline in output in Ukraine has largely been due to factors other than dislocations of labor and capital” (p. 150) apparently conforms to the real-life evidence. Banaian indicates that Ukraine’s economy was in the state of decline throughout the 1990’s, with falling GDP, price instability, high unemployment, and a growing shadow economy. He asks important questions: What went wrong? Why? What are the prospects? Naturally, the discussion goes beyond the analyses of monetary indicators or econometric estimation, with much attention paid to political and social developments in the country. Banaian looks at the legacy of Soviet planning, the legislative stalemate, and the rise in corruption. Although some issues are discussed at length and others just briefly, the reading is informative. Yet sometimes Banaian looks for simple answers when they are hard to find, and this reviewer does not always agree with him. For example, his attempt to link Ukraine’s economic problems to the Soviet past is unpersuasive: “The Soviet model combined large amounts of capital with mostly unskilled labor and conserved resources in services by forcing workers to live in high-density residential areas” (p. 143). The first part of this statement, the only part that this reviewer understands, refers to Soviet labor as unskilled; that, to my knowledge, is untrue. Banaian himself refers to Ukraine’s labor force as well educated (p. 150), which is a contradiction since educational standards only deteriorated after the demise of the USSR, especially in technical disciplines. A comment on the issue of Ukraine’s corruption is in order. Banaian links it to activities of powerful clans, i.e., “groups of individuals holding local monopolies on political power and controlling many enterprises” (p. ix). The reader may be misled by the title of Chapter 5, “The defeat of the clans,” since the text makes it clear that the end to corruption is nowhere in sight; nor are local industrial oligarchs, if using Russian terminology, going to become vegetarians. Banaian indicates that the Donetsk and Dnipropetrovsk clans have been the most active; they “were able to thrive because bribe collection was either ignored or shared with the center in Kyiv” (p. 123). Without going into a lengthy discussion, corruption in Ukraine is not limited to bribery, but it is widely accepted as a way of life. It is considered appropriate to disregard laws, evade taxes, or break a business contract.
192
BOOK REVIEWS
Finally, as it is popular among westerners, Banaian portrays the developments in Ukraine since independence as a dramatic struggle between the reform and antireform forces, with the former exemplified by President Kuchma and the latter by ex-President Kravchuk. The use of such terminology is unfortunate. Ukraine lacks competent and trustworthy leadership, and many of the so-called reformers do not meet these criteria. The intent of my comments is to clarify some inconsistencies in Banaian’s book so that the reader could derive the greatest benefit from it. Overall, I would recommend it as a good source on Ukraine’s economic and social development in the 1990’s. Whether one is well acquainted with the challenges faced by Ukraine or is just a beginner, one will find the book an enjoyable read. Fyodor I. Kushnirsky Temple University Philadelphia, Pennsylvania 19122
King Banaian, The Ukrainian Economy Since Independence. Northampton, MA: Edward Elgar, 1999. x + 173 pp., index, $70.00. As the title indicates, the book is about Ukraine’s economic performance from 1991, when it gained independence, to 1999. The book provides a chronological overview of major developments in Ukraine’s economy and society and, at the same time, analyzes the evolution of its growth and other macroeconomic indicators. This combination of descriptive and analytical approaches to the topic is fruitful. The presence of such an analytical component distinguishes this book from a similar earlier publication, Ukraine’s Economic Reform: Obstacles, Errors, Lessons, by Raphael Shen (Westport, CT: Praeger, 1996). Shen’s book is based on interviews with Ukrainian economists, statisticians, and government officials, so that it relies on their views. Banaian, on the other hand, spent a year between 1995 and 1996 working as a U.S. AID macroeconomic advisor to the National Bank of Ukraine; as a result, he was able to collect first-hand information and draw conclusions based on his own observations. The central theme of the book is best characterized as an assessment of three goals of transition, i.e., stabilization, liberalization, and privatization, specified by Banaian, and much of the book’s discussion is focused on the successes and failures of their implementation in Ukraine. He pays significant attention to hyperinflation in Ukraine in 1992–1993 when consumer prices rose by an average 40% per month. Banaian gives three reasons: lack of a capital market, decline of tax revenue, and reliance on seigniorage, i.e., printing money (pp. 31–40). Each of the reasons is well articulated and supported by documented data, in particular money supply, seigniorage revenues, and taxes. However, all former Soviet Union (FSU) countries experienced similar problems; yet inflation rates were much lower in most of them, including Russia, than in Ukraine. Moreover, some of the aforementioned reasons, e.g., decline of tax revenues, could in turn be caused by other developments. As usual, many Ukrainians blame outsiders, e.g., the United States, the IMF, and of course Russia. To others, it is evident that their leadership put the cart in front of the horse by liberalizing prices prior to privatization. Being industrialized turned out to be a liability for Ukraine since its industry could no longer compete after the opening of the economy. Two quite interesting topics, whose coverage benefited from Banaian’s activity in Ukraine, are the performance of the National Bank of Ukraine and the saga of the introduction of the national currency, the hryvnia. As in any developing
0147-5967/01 $35.00 C 2001 by Academic Press Copyright ° All rights of reproduction in any form reserved.
190
BOOK REVIEWS
191
country, the exchange rate affects standards of living in Ukraine, and its people, from school students to pensioners, take interest in it on a daily basis. Banaian uses an econometric model to estimate the exchange rate and the effect on it of obligatory sales of a part of firms’ foreign currency earnings back to the NBU (pp. 108–115). These sales tend to push the exchange rate down, i.e., appreciate the hryvnia, much to the dismay of exporters and satisfaction of ordinary people. A student in the field of transition will also appreciate Banaian’s using econometric models to analyze the prospects for economic growth in Ukraine. He estimates production functions, growth, and productivity for the economy and five of its sectors: industry, agriculture, construction, transport and communications, and trade and procurement (pp. 144–150). His finding that “the decline in output in Ukraine has largely been due to factors other than dislocations of labor and capital” (p. 150) apparently conforms to the real-life evidence. Banaian indicates that Ukraine’s economy was in the state of decline throughout the 1990’s, with falling GDP, price instability, high unemployment, and a growing shadow economy. He asks important questions: What went wrong? Why? What are the prospects? Naturally, the discussion goes beyond the analyses of monetary indicators or econometric estimation, with much attention paid to political and social developments in the country. Banaian looks at the legacy of Soviet planning, the legislative stalemate, and the rise in corruption. Although some issues are discussed at length and others just briefly, the reading is informative. Yet sometimes Banaian looks for simple answers when they are hard to find, and this reviewer does not always agree with him. For example, his attempt to link Ukraine’s economic problems to the Soviet past is unpersuasive: “The Soviet model combined large amounts of capital with mostly unskilled labor and conserved resources in services by forcing workers to live in high-density residential areas” (p. 143). The first part of this statement, the only part that this reviewer understands, refers to Soviet labor as unskilled; that, to my knowledge, is untrue. Banaian himself refers to Ukraine’s labor force as well educated (p. 150), which is a contradiction since educational standards only deteriorated after the demise of the USSR, especially in technical disciplines. A comment on the issue of Ukraine’s corruption is in order. Banaian links it to activities of powerful clans, i.e., “groups of individuals holding local monopolies on political power and controlling many enterprises” (p. ix). The reader may be misled by the title of Chapter 5, “The defeat of the clans,” since the text makes it clear that the end to corruption is nowhere in sight; nor are local industrial oligarchs, if using Russian terminology, going to become vegetarians. Banaian indicates that the Donetsk and Dnipropetrovsk clans have been the most active; they “were able to thrive because bribe collection was either ignored or shared with the center in Kyiv” (p. 123). Without going into a lengthy discussion, corruption in Ukraine is not limited to bribery, but it is widely accepted as a way of life. It is considered appropriate to disregard laws, evade taxes, or break a business contract.
192
BOOK REVIEWS
Finally, as it is popular among westerners, Banaian portrays the developments in Ukraine since independence as a dramatic struggle between the reform and antireform forces, with the former exemplified by President Kuchma and the latter by ex-President Kravchuk. The use of such terminology is unfortunate. Ukraine lacks competent and trustworthy leadership, and many of the so-called reformers do not meet these criteria. The intent of my comments is to clarify some inconsistencies in Banaian’s book so that the reader could derive the greatest benefit from it. Overall, I would recommend it as a good source on Ukraine’s economic and social development in the 1990’s. Whether one is well acquainted with the challenges faced by Ukraine or is just a beginner, one will find the book an enjoyable read. Fyodor I. Kushnirsky Temple University Philadelphia, Pennsylvania 19122