May 30, 2010

Ukraine’s Prospects

I am reading couple books – Economic Analysis of Property Rights by Yoram Barzel and Free Market Environmentalism by Terry Anderson and Donald Leal. These books are not about Ukraine. But these books have great insights that can be applied to Ukraine. So here is what I am thinking.
Human values matter only for human decisions. Human beings always respond to incentives. Price provides the strongest incentive since money matter a lot for most people. Price sends a correct signal only in a free market and democratic society. Otherwise, a price signal comes with a white noise - a market distortion (e.g. central planning in the former Soviet Union). Then everything goes wrong. Free market economy needs democracy as much as a democracy needs market economy. Without a free expression of a political will, a dictator can destroy an unfettered faith in a free market process. Without a faith in a free market, people will not respect market prices and property rights. Without a free market, a democratic society can't use its resources efficiently because the social decisions are not based on the market prices. The final element is a rule of law. Without a rule of law, a democratic nation with a free market economy will always operate at a suboptimal level because a cornerstone of a free market society – private property – is not protected by the law. Thus, a nation can prosper only if three elements are in place. Otherwise, a nation is doomed to be an underachiever.
So where is Ukraine now? Ukraine has two elements in place – an emerging free market economy and a consolidating democracy. The rule of law is a weak link in Ukraine's path of post-socialist development. A recently elected Ukraine's president – Mr. Yanukovich - is more likely to follow the Putin's Russia style of command and control rather than a very hands-off approach of his predecessor – Mr.Yushchenko. It's a no-brainer to predict Ukraine's path of development under Mr. Yanukovich. His team will curb media freedom, redistribute state property through privatization to his donors, increase a tax burden on private sector except friendly corporations, and cater specifically to the Russian interests. Does Ukraine have a strong political opposition to offset any potential damage to be made by Mr. Yanukovich. Yes. At least, three politicians can resist Yanukovich's advancement against democracy and free market. It will be former prime minister Yulia Tymoshenko, former president Viktor Yushchenko, and former parliamentary speaker Arsenyi Yatseniuk. I guess that we will see really soon whether the Ukrainian trinity can work effectively from the barricades of the parliamentary opposition.

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