September 7, 2011

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.

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