Why is the Ukrainian economy such a mess?
When Ukraine became an independent nation in 1991, it was more or less on the same economic basis as its neighbors. Look what has happened since:
I left Moldova, which shares a border with Ukraine and is even poorer. But Moldova is a small landlocked country of 3.5 million people. Ukraine has 45 million inhabitants, is the second largest European country by area (after the European regions of Russia and not counting the Asian regions of Turkey) and in all respects is expected to be one of the major powers economic aspects of the continent.
This is not the case. Instead, Ukraine was deeply in debt and seeking bailouts from the West and the East when an uprising toppled President Viktor Yanukovych in February, then a Russian invasion of the Crimean Peninsula swept the country apart. the center of global political attention. I was curious about the economic roots of this turmoil, so I spoke to Chrystia Freeland.
Freeland is a new member of the Liberal Party in the Canadian Parliament representing downtown Toronto. She also grew up speaking Ukrainian. Her late mother was a child of Ukrainian refugees, born in a displaced persons camp in Germany just after WWII and raised in Canada, who returned to Ukraine in the early 1990s to help draft the country’s constitution, among other things. Chrystia Freeland was also in Ukraine at this time, working as a freelance writer for several Western publications. She began a career as a journalist at the Financial Times, Globe and Mail, and Reuters, and has written books on Russia’s transition to capitalism and the rise of global plutocracy. She spent the last week in Ukraine and wrote a essay on the political situation there for last sunday New York Times.
What first made us think of calling you was this news about a week ago that the new Ukrainian government asked a few oligarchs to help it by becoming governors of the eastern provinces. What’s up with this?
I was also really struck by this news. I think the Ukrainian people should have medium term concerns about this – one of the reasons you had this uprising against Yanukovych was because there was too much crony capitalism.
But in the short term, especially given the Russian invasion of Ukraine that followed, this turns out to be rather premonitory action. What is not entirely obvious if you are outside of Ukraine is to what extent Yanukovych compromised the whole structure of government. State institutions were incredibly compromised, incredibly corrupt. The result was, after the overthrow of Yanukovych, in parts of the country the government has just melted down. What the oligarchs in Eastern Ukraine were able to do because they are very, very wealthy and have their own strong local organizations and contacts, is to rebuild some kind of government presence very quickly.
The other consequence of entrusting them with eastern Ukraine is to show how this image of the country divided along ethnic lines, of a Yugoslav-style ethnocultural conflict, is simply not true. It turns out that many of these oligarchs are not ethnically Ukrainian.
Who are these oligarchs? We know the Russian variety, what is the same and what is different from the Ukrainian variety?
Usually they made their money in heavy industry, so it’s quite different from most Russian oligarchs. That’s why they’re not that rich, because there wasn’t that much money to be made. There were a lot of Soviet-era machine-building factories in eastern Ukraine, machine-building and metal factories. There are also banking and media interests.
The East has this old industrial base. What is the Ukrainian economy as a whole? Is it heavily agricultural?
The industrial base is large, especially in eastern Ukraine. We all know Ukraine is the breadbasket of Europe, and it is indeed an incredibly fertile country. There has been a lot of Chinese investment in this part of the Ukrainian economy. There is also a technology outsourcing industry. And then finally, in parts of Ukraine, tourism became more important.
Why is the economy such a mess?
Because of very bad kleptocratic governments. This is 90% of the reason. In terms of the economy, Ukraine only accomplished maybe half of the things you need to do, when the Soviet Union collapsed and transitioned to a market economy. They have done privatization. There are now a lot of private companies, and there is a market. It is important for us to remember that not so long ago even the sale of a pair of jeans was illegal.
But what they have failed to do is build the rule of law and effective government institutions. Corruption, at least in Yanukovych’s time, was absolutely rampant. And some important public finance reforms have not taken place. In particular, energy prices are always subsidized. Of course, when you switch to open market prices, it’s a huge shock to the company. But Ukraine’s failure to liberalize energy prices partly explains its heavy dependence on Russia.
Having said that, and having been in Kiev * last week, I think there is a bit of an Italian phenomenon going on, where you actually have a very educated and very entrepreneurial population, but because you had this incredibly corrupt state. , much of the Ukrainian economy has gone underground. Walking the streets of many Ukrainian cities – Kiev, Lviv in western Ukraine, Dnipropetrovsk in the east – you feel in a much more prosperous society than official data reflects.
the official data It’s incredible. Poland on one side and Russia on the other are both in the 20,000-plus per capita GDP, and Ukraine is officially at $ 7,298.
There is no doubt that Ukraine is doing well, much worse than Poland. This shows the importance of government decisions. These countries weren’t that far apart in 1991, when Ukraine became independent, and the Poles on the whole did the right thing, unlike the Ukrainian government.
I have the impression that almost every government since independence has had big problems with corruption, but under Yanukovych it has gone from what the government did to why the government existed. Is it right?
One of the founders of the Maidan movement is this former investigative journalist called Yegor Sobolev. He said what drove him crazy was that it couldn’t even be called corruption anymore. It was like a marauding horde. Corruption ceased to be something low-paid public servants did next to and became the main reason for government existence.
Radek Sikorski, the Polish Foreign Minister who played a very good and important role in Ukraine, said that before the fall of the Yanukovych regime he went to a meeting with Ukrainian officials and they laughed of him because he regularly supervised. He said everyone in that room had a wristwatch worth $ 30,000. It is a sign of a truly corrupt government.
With this new regime, do you see the potential for Ukraine to move in the right direction?
I think this government has better chances than any previous Ukrainian government. Much will of course depend on the presidential elections, and then it will take new legislative elections. But so far it’s a bunch of people who understand what to do. They saw Central Europe and the Baltic republics take this route. It’s pretty clear what to do.
What really impressed me is that the government immediately took action last week to be more transparent and less empowered. All the departments had these huge fleets of cars, and they reduced them to one car per department. When Yatsenyuk, the Prime Minister, visited Brussels last week, he flew in a commercial demonstrative manner. They are absolutely gestures, but they symbolize something important.
Having said that, economic reform, urgent as it is for Ukraine, falls apart when you are invaded, and that is the state of the country right now.
* When Freeland said it, it sounded like “Kayiv”, so I chose that spelling instead of the old “Kiev”.