After 18 Years of Transition: Are We There Yet?

Ukraine and other post-Soviet countries started their transition from socialism in 1991. Other former socialist countries like Hungary and Poland started their transition in 1989. The Czech Republic and Slovakia stepped on the path of socialist-capitalist transition in 1990. Overall, the former Soviet countries and the former satellites of the USSR started their economic transitions in almost the same period of time. Nonetheless, former socialist countries have achieved different levels of economic development since then. 

To measure a level of economic development, we can look at per capita GDP (measured in 2005 purchasing power parity (PPP) dollars) compiled by the World Bank. And what do we see? Slovenia and the Czech Republic started their transitions with the first and second highest per capita income among post-socialist countries and retained their status of high-income countries.  If the initial economic conditions matter for future economic development, a successful transition of the Czech Republic and Slovenia make this point. Both countries are members of the EU. 

But we can also see that many post-socialist economies with less favorable initial conditions outperformed others with the more favorable ones. A case in point is Russia that lost its economic position in eighteen years of transition from the sixth to the ninth highest per capita income among the transition economies. Poland, Lithuania, and Estonia outperformed Russia while their initial per capita income was much lower than Russia’s.  

 

Unfortunately, Ukraine is among countries that still have their per capita income below the pre-transition level. After eighteen years of transition per capita income declined in several post-socialist economies like Serbia, Georgia, Ukraine, and Tajikistan. Of course, economic performance of Serbia, Georgia, and Tajikistan was distorted by civil wars. For example, Georgia’s economy was severely devastated by the civil war. The Balkan war conflict also had a devastating economic effect on several countries of the former Yugoslavia. Thus, initial economic conditions can only partially explain differences in transition economies after eighteen years of transformation. Weak rule of law, civil conflict, and other political economy factors have a significant effect on a path of economic development. 

But what happened to Ukraine?  After 18 years of reforms Ukraine remains an upper middle-income country. However, per capita income has declined by almost 20% percent since the start of transition in Ukraine. What is Ukraine's excuse?

AIER Summer Fellowship Program

Dear Friends,
 

As its alumnus, I would like to encourage economics students to apply for the 2012 Summer Fellowship Program organized by the American Institute for Economics Research located in a picturesque town, Great Barrington, in Massachusetts, USA.

For over 50 years, the AIER summer fellowship has provided direct training and financial support to students pursuing graduate degrees in economics. The program is designed to offer students advanced instruction on three subjects: useful procedures of scientific inquiry; the history of property rights; and sound money. These core seminars are supplemented by lectures from visiting scholars and speakers.

AIER is a non-profit research and educational organization, and most of our educational efforts are carried out through distribution of our publications to the general public. However, the Summer Fellowship Program also forms a key part of our efforts.

To learn more about this year's program, please visit our website at www.aier.org/fellowships. 

Who is Eligible?  Gratuate students who are enrolled in a doctoral program in economics or an approved related field such as law and economics or financial history; or graduating college seniors who plan to be enrolled in such a program.

What is the Deadline for Applying? Applications must be received by March 23, 2012

The State of Human Rights and the Rule of Law in Russia

While the troops of Syrian President Bashar-al-Assad are pounding with shells, mortars, and rockets two cities of Syrian opposition, Horns and Zabadani, the UN Security Council is still in a political stalemate because both Russia and China vetoed the UN action on Syrian crisis. In the light of current state of foreign affairs, it is very interesting to watch the recent meeting of the Subcommittee on European Affairs of the US Senate Committee on Foreign Relations where major stake-holders discuss human rights and rule of law in Russia and the US policy towards Russia. 

The meeting was divided in two panels presided by Senator Shaheen (D-NH). The first panel included excellent experts on Russia such as the Honorable Phil Gordon from Bureau of European and Eurasian Affairs at the US Department of State and Thomas Melia, Deputy Assistant Secretary of State Bureau of Democracy, Human Rights, and Labor at the U.S. Department of State. The second panel included another badge of distinguished specialist on Russia, Honorable David Kramer, President of the Freedom House, Edward Verona, President of the US-Russia Business Council, and Thomas Malinowski, Director the Human Right Watch. You can watch a full video of this panel or read testimonies if you click here. Comments are very welcome.  

Ukraine at a Crossroads: What's at Stake for the U.S. and Europe?

Last Wednesday the Subcommittee on European Affairs of the US Senate Committee on Foreign Relations met to discuss a political and economic situation in Ukraine. The panel, presided by Senator Shaheen (D-NH), included Honorable Steven Pifer, the former US ambassador to Ukraine, Damon Wilson, Executive Vice President of the Atlantic Council, Edward Chow, Senior Fellow of the Center for Strategic and International Studies, and Eugenia Tymoshenko, daughter of the former prime minister of Ukraine, Yulia Tymoshenko. You can watch a full video of this panel or read testimonies if you click here. Comments are very welcome.  

Ukraine's FEMEN Protests at Davos Forum

Ukraine's activist group shines on a global scale. Its message, however, is very obscure. "Davos, Switzerland (AP) -- Three topless Ukrainian protesters were detained Saturday while trying to break into an invitation-only gathering of international CEOs and political leaders to call attention to the needs of the world's poor."
Click here if you want to read more.

Black Market in Agricultural Land is Booming in Ukraine

with Oleg Peregon, Vice President, NGO Green Front, Ukraine

A sale of agricultural land has been illegal in Ukraine since the Moratorium Act of 1992. Despite many promises, neither administration liberalized a market in agricultural land. Nonetheless, a black market in farmland has thrived. Now it is becoming one of the largest illegal markets in farmland, with approximately $900 million in annual sales, in Eastern Europe. The black market has a backing of local state officials. Corrupt bureaucrats embezzle their power to stuff their pockets with cash while they are stripping the nation of important natural resource and robbing poverty-stricken rural population of their private property. The black market causes environmental degradation and undermines sustainable economic development of Ukraine, one of the major world grain exporters.

The moratorium has never stopped the black market in Ukraine. According to Ukraine’s State Committee on Land Resources (SCLR), almost 20 percent of farmland changed ownership in the last decade. And it seems that the black market is booming now more than ever. Kharkiv-based environmental NGO Green Front reports that a number of sales advertisements featuring farmland has increased in local newspapers recently. The popular local newspaper Premier went from 58 to 300 weekly sales ads in less than a month. The black market has also made it to the internet. Now you can find hundreds of listings of farmland sellers online. For example, online store AllBiz that is popular in Ukraine has almost 200 listings of farmland sellers. Many sellers’ websites even guarantee a one-day delivery of farmland.

The black market in farmland is going strong with no questions asked. The buyers are farms, greenhouses, flower shops, landscapers, and house owners who can afford landscapers. The sellers are either firms subcontracted by the local government or local state officials. The black market quantity is equal to a capacity of one truck (e.g. Russia-made Kamaz truck). A single Kamaz truck carries, on average, ten tons of soil. The black market price is seasonal with its high in spring and summer ($80-100 per ton) and its low in fall and winter ($150-180 per ton). According to the Green Front, the projected annual sales are almost $900 million in Ukraine.

This is how the black market works. An excavator digs out fertile soil, on average, up to four feet deep. Then an excavator loads a soil into a truck that delivers a product to a buyer. To double their profits, infamous entrepreneurs bring garbage from urban areas and dump it in the excavated areas. Thus, the damaged farmlands are converted into illegal landfills. This black market activity causes irreversible soil depletion and environment pollution. The SCLR reports that almost 32 percent of farmland is degraded and 20 percent of arable farmland is low-yield due to soil erosion. It is obvious that the black market could not reach the current volume of sales without backing of state and law enforcement officials. 

The state officials abuse law even when it comes to private ownership of their constituency. The black soil is extracted from two main sources: abandoned land and retiree-owned land. A so-called abandoned land is a land parcel whose heirless owner is deceased. Abuse of the abandoned land is just another proof of the government embezzlement because ownership of the abandoned land is transferred to the local authorities automatically in Ukraine. The magnitude of the power abuse is mind-boggling. When the NGO Alternative interviewed deputies (Party of Regions) of the Pesochyn village council in Kharkiv province, the second largest province of Ukraine, the Regionals said blatantly that the farmland sale is only legal in their county while it is illegal elsewhere.

Retirees who own farmland also suffer a great deal from the government abuse. The SCLR reports that 53 percent of land owners are retirees and 30 percent of them have no heirs. The Green Front reports several cases when the soil was extracted from the land parcels owned by pensioners in Kharkiv province. Several local residents tried to stop the illegal extraction of their land. However, the local government silenced the whistleblowers. The Green Front also submitted evidence of illegal extraction of land, including these pictures, to the Kharkiv department of law enforcement. The law enforcement officials considered available evidence insufficient to open a case. 

                                                                   NGO Green Front copyrights.

                                                                    NGO Green Front copyrights.

Right now it is too early to predict the impact of the black market in agricultural land on Ukraine’s economy, one of the major world grain exporters. It is clear that the current black market activity causes irreversible damage to the environment and retards economic progress. And the government embezzlement not only undermines a fundamental institution of capitalism and democracy – secure private property rights but also erodes trust and accountability in political order.

Who in the World is Freest of All?

   The long-awaited annual edition of the Economic Freedom of the World has been released by the CATO Institute, American public policy think tank. The CATO team of researchers, led by Dr. James Gwartney (Florida State University), Dr. Robert Lawson (Southern Methodist University), and Dr. Joshua Hall (Beloit College), measure a degree of economic freedom with respect to five areas of economic activity: size of government, rule of law, monetary system, international openness, and government regulation.

  Hong Kong still remains the freest economy of the world, followed by Singapore, New Zealand, Switzerland, Chile, Australia, Canada, Chile, the U.K, Mauritius, and the U.S. This is basically the top 10 of the Economic Freedom of the World report. 

    Zimbabwe is the least free economy of the world, representing the poverty-stricken region of Sub-Saharan Africa. The bottom 10 of the economic freedom rankings also includes Myanmar, Venezuela, Angola, Democratic Republic of Congo, Central African Republic, Guinea-Bissau, Republic of Congo, Burundi, and Chad. Let us hope that the new Miss of the Universe from Angola, Leila Lopez, can attract more international attention as well as foreign investors to her country.

    Where is Ukraine? Ukraine with the level of economic freedom measured at 5.7 out of 10 is actually in the bottom 20 economies. While the economic freedom grew during the Yushchenko presidency, Ukraine could not catch up with Russia. The CATO Institute ranks economic freedom in Russia (6.55 out of 10) much higher than in Ukraine by placing the former in the top 80 economies. Due to obvious political reason, Belarus is not in the rankings. If the Yanukovych administration does not stop a self-destructive public policy, Ukraine may stop showing up in the Economic Freedom of the World rankings as well.

  

    Overall, the CATO Institute points out that economic freedom of the world fell for the second consecutive year: “The average economic freedom score rose from 5.53 (out of 10) in 1980 to 6.74 in 2007, but fell back to 6.64 in 2009, the most recent year for which data are available.”

What is Ukraine’s Biggest Economic Woe?

Ukraine’s economy is still recovering from the global 2007-2009 economic recession that had a devastating impact on the national economy.  Economic growth rate is nearly half of the pre-recession average rate. Unemployment rate is approaching double digits. Inflation is rampant. Ukraine's external debt is nearly equal to Ukraine’s GDP. Overall, the economic situation is very drastic and it requires a new approach to the current economic policy.
A jobless stagnant economic recovery is very common among many developed and industrialized countries. The EU economy is still struggling with its recovery, hindered by the fiscally troubled PIIGS countries (i.e. Portugal, Greece, Italy, Ireland, and Spain). The European economists scramble to find a way to reduce Spain’s 20-percent unemployment rate and create strong incentives for a fiscal accountability for the PIIGS.
The U.S. economy is also going through a jobless stagnant economic recovery. The Congressional Budget Office (CBO), major nonpartisan American research organization, downgraded the US rate of economic growth to 1 % in the Q2. The US unemployment rate is 9.1% that translates into more than 14 million jobless Americans.
Of course, comparing Ukraine with the EU or USA is similar to comparing apples with oranges. A difference is very substantial to draw any fundamental conclusions. Nonetheless, Ukraine’s economy seems to be facing similar structural problems which are present in both the EU and USA.
So, what is going on with the American and European economies? The answer can be found in the hotly debated book, Great Stagnation, by Tyler Cowen, co-author of the one of the most popular economic and business blogs, Marginal Revolution and Professor of Economics from George Mason University, USA. Professor Cowen writes that the US economy as well as other developed economies got stuck because a supply of low-hanging economic fruit is exhausted.
What is a low-hanging economic fruit? Education, immigration, urbanization, natural resources, and technological innovation. According to Professor Cowen, the developed nations got stuck because they have been exhausting low-hanging economic fruit for the most part of the last century and eventually they hit the bottom. Growth rates of output and median incomes have a steady downward trend across the developed economies over the last few decades. This empirical fact supports Professor Cowen’s argument. 
Dr. Cowen writes that the United States and European countries have nearly exhausted a potential of educational attainment. Most population has not only high school diplomas but also college degrees. Instead of being a valuable asset, education is eroding its value because its marginal gain is diminishing. If there is any genius left without any formal education in the US or EU educational system, he or she must be hiding under a rock.
Economic impact of immigration is also declining because modern immigrants do not have the same comparative advantage (e.g. higher level of education, cheap labor force) as compared to immigrants in the 1800s and 1900s. Immigrants still contribute to economic growth of the developed economies but easy gains of immigration are nearly gone. Natural resources are also overexploited in many rich countries. The gold rush, the booming mining towns, and the oil booms are now subjects of economic history rather than economic reality.
Dr. Cowen also asks us to think about the most recent major technological innovation that drastically changed our lives. He argues that most innovations were exploited in the 1950s and 1960s, except for computers and internet. Cowen writes that even consumer goods did not have any major revolutionary change since the 1930s and 1940s when household products changed drastically: air conditioning, refrigerators, washers, dryers, dishwashers, radios, televisions, phones, and affordable cars. Modern households have the same household items with slight technological improvements.
Moreover, Dr. Cowen points out that an economic impact of consumerism is also diminishing because most households in the developed countries have already had all necessary household items. Many households have kitchen appliances, internet, several TVs, several laptops, several cell phones, several cars, and so on. Moreover, the global recession made consumers much poorer and more cautious about their spending and credit cards. As a result, the level of consumer confidence is pretty low in America, Britain, and Europe. The US consumer-confidence index has reached the lowest level (45%) since June 2009, the official start of economic recovery in the US. Thus, the Keynesian demand-side economic policy, the working horse of the American and European governments, is another low-hanging economic fruit that is nearly gone.  
Ukraine also fits Professor Cowen’s theory quite well. Ukraine’s economy has nearly exhausted a supply of low-hanging fruit. Educational attainment was always high in Ukraine, even back in the Soviet period. A flow of immigrants was never strong for Ukraine. In contrast, Ukraine suffered from a tremendous brain-drain before and after the collapse of the former Soviet Union. Blue-collar workers are also leaving Ukraine. Many workers from the Western Ukraine work permanently in Europe while workers from the Eastern Ukraine travel all the way to Moscow, Russia’s capital, to find a job at a construction site. Youngsters, especially women, use very popular work-and-travel programs to go overseas and stay there legally or illegally. Young people, blue-collar workers, and intellectuals leave Ukraine because of very limited opportunities available to them in their Motherland.
According to the State Statistics Committee of Ukraine (SSC), the unemployment rate remains at 9.5% or 2.1 million jobless Ukrainians. Unfortunately, the SSC does not report labor statistics about part-time workers who want to have full-time jobs and discouraged workers (who gave up looking for a job). Various independent surveys report that the actual rate of unemployment is around 18% or almost 4 million jobless Ukrainians. There is a drastic shortage of a demand for labor in Ukraine. A discriminatory nature of Ukraine’s job market supports data from independent surveys. Ukrainians know really well that your chances to get a job decrease exponentially with your age. Ukrainians also know that employers discriminate against females and, especially, single mothers. If you are 50 years-old female and without a job, your chances to find a well-paid job are close to nothing. Ukraine’s job market is both ageist and sexist.
Urbanization, natural resources, and technological innovation are also nearly exhausted by Ukraine’s economy. Ukraine as any European country is highly urbanized. So there is not a lot of potential for real estate and infrastructure development. Natural resources were also heavily exhausted, first, by the Soviet nomenclature, and then by the Ukrainian oligarchs. The technological potential of Ukraine is hardly competitive at the world level. The above-mentioned brain-drain diminished the potential of technological innovation significantly because neither state nor private philanthropists tried to prevent it by supporting scientists financially.
Things get worse if we bring into equation economic and political institutions existing in Ukraine. First, Ukraine’s economy is still in a “gray zone” somewhere between state-controlled and oligarch-controlled economy where state and oligarchs are not separate from each other. The “gray zone” economy retards any economic progress. Second, Ukraine’s political system is also in a “gray zone” of transitional democracy where the façade of political institutions looks appropriate but these institutions are rotten inside. Ukraine has a presidential-parliamentary political system without any working system of checks and balances. The political oligarchy retards any democratic progress. Finally, both economic and political institutions are subject to a pervasive lawlessness where those who must enforce the law abuse it. Thus, the oligarchic “gray zone” economy without any rule of law is the biggest economic woe of Ukraine. Under these circumstances, if there is any low-hanging economic fruit left, it is more likely to be rotten inside. Ukraine’s economic recovery can have a bitter aftertaste unless the current institutional status quo is changed.

Logrolling in Ukraine

     A logrolling or vote-trading is a common practice that elected officials use to pass laws. If you need a support from other elected officials, you promise them to vote for their bill in exchange for their votes. Ukrainian deputies went even further than a simple trading of votes. They trade their ID cards. If you need my vote, you can take my ID card and use it to vote for your bill.   
     Here is an amazing video that shows a session from Ukraine's Parliament. Click on this link and watch from :29 to 1:00.  You will see how a deputy checks in dozens of his colleagues. Then you will see that a head count (424) is far from an actual number of deputies. Finally, you will see how a deputy who uses several ID cards votes for his own proposed bill. Nonetheless, his bill did not pass the parliament. 
     Here is another video about logrolling Ukrainian deputies.

If you are interested in reading about logrolling, start here.

Ukrainian Workers Are Strike-Averse

    Another cool statistics from the Kyiv Post's Maria Shamota shows that Ukrainian workers had the lowest number of strikes in Europe in 2008. Ukrainian employees went on strike only thirteen times. Swedish workers had 18 strikes and British employees went on 144 strikes. Italian workers who are the leaders of the European labor movement went on 1,339 strikes in 2008. Even if you adjust number of strikes per capita, Ukraine still had the lowest number of strikes per capita in Europe.
    There are couple things which puzzle me about these data. First, workers in Austria, Belgium, Bulgaria, and Czech Republic did not go on strike at all because their strike was either cancelled or a conflict was resolved. Second, I do not see France in this chart while the international mass media often talks about French workers going on strike.
    Anyways, can we really say that Ukrainian workers are more strike-averse than their European colleagues? Is there another explanation behind these data? What if Ukrainian workers incur higher opportunity costs of going on strike than do their European counterparts?