The Ukrainian Transition Experience Adrian Hruszkewycz

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The Ukrainian Transition ExperienceAdrian
Hruszkewycz
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Outline

• Introduction
• Hyperinflation
• Privatization
• Financial Sector Development
• The Future

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Introduction

• Second largest landmass, fourth largest
  population in Europe
• 50 million people
• Rich in agricultural and natural resources
• Technological powerhouse during the Cold War
• 25 of all companies produced military goods
• Not yet officially recognized as a market
  economy by the EU or EC

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General Trends
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General Trends
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Hyperinflation
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Hyperinflation
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Hyperinflation

• Causes
• No infrastructure to collect taxes and to
  determine how much is owed
• Poor statistics available for estimation of
  government budget
• Price liberalization
• Seigniorage
• Government subsidies to inefficient state-owned
  enterprises
• 1993 most economically illiterate nation on
  earth

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Hyperinflation

• Solutions
• People lost faith in the currency and reverted to
  bartering with material goods
• Government forced to stop printing useless money
• Currency collapsed
• Followed by new currency and changes in fiscal
  policies in 1996

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Privatization

• Proceeded much more slowly than other Eastern
  European countries
• A result of overindustrialization
• Ukraine produced 17 of Soviet output
• Industrial managers formed a strong political
  lobby opposing reform
• Government paid large, direct subsidies to state
  enterprises
• Gave little incentive for them to privatize and
  run efficiently
• Privatization came in three stages

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Privatization

• Stage 1 (1992-1994)
• lease with an option to buy
• Meant to give employees opportunity to own parts
  of a company
• Employees leases often funded by strong
  directors who took control of the company in the
  end
• Companies successfully bought out by employees
  often failed due to a lack of managerial skill

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Privatization

• Stage 2 (1995-1998)
• The Mass Privatization Program
• All citizens received vouchers to be exchanged
  for shares of companies up for auction
• 100-500 companies auctioned a month
• Citizens could not purchase enough shares to own
  a majority of a company and influence the
  managers of their companies
• Citizens often sold their vouchers to companies
  for immediate cash
• These companies then competed in the auctions and
  bought themselves

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Privatization

• Stage 3 (1999-Present)
• Privatization of large state-owned enterprises
• Emphasis has been to find strategic investors to
  raise privatization revenues for the state
• This has been a slow process and many of the
  largest corporations remain under state control
• Re-privatization

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Privatization
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Privatization
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Financial Sector Development

• This remains the critical missing component for
  facilitating economic growth
• Characteristics of a developed financial sector
• The government has to respect and guarantee
  property rights
• Must allocate risk and investment widely and
  efficiently
• Must develop an infrastructure to collect
  information and counter fraud

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Financial Sector Development

• Banking System
• Accounts for 95 of all financial sector assets
• Total bank assets are only 20 billion
• One small European band can have assets
  comparable to those of Ukraines entire banking
  system
• Access to bank credit limited
• Vulnerable in terms of capitalization and risk
  management

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Financial Sector Development

• Non-Bank Financial Institutions
• Accounts for 5 of financial sector assets
• Illiquid stock market with little trading
• Access to capital beyond banks is limited

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Financial Sector Development

• Laws and Enforcement
• Civil Code and Commercial Code introduced in 2004
• Regulate differently on the same issues
• Serious obstacle in gaining market economy status
• Corrupt law enforcement and judicial system
• Detrimental to attracting FDI necessary to
  bolster a transition economy

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Financial Sector Development
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Financial Sector Development
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Financial Sector Development
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The Future

• Growth will not continue without continued reform
• Large enterprises still under state control must
  be privatized to increase their efficiency
• Legislation must be put in place and enforced to
  protect investors to promote FDI and investment
  in stocks
• The Orange Revolution