March 7, 2012

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?

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