A Post-Soviet Puzzle: The Case of Ukraine After Independence A Thesis Presented to The Faculty of the Departments of Economics and Political Science The Colorado College In Panial Fulfillment of the Requirements lor the Degree Bachelor of Arts By Yaroslav V. Hetman May 200; 'I'll My Familj CONTENTS Acknowledgements .................. ... 11 Introduction .. .............................................. 1 1. Transition Theory. ........ 3 2. Ukraine, Before and During Transition ........................ ........ 18 3. The Puzzle ............... ............. 48 4. Ukraine's Economic Growth Between 2000 and 2004 ...................................... 50 5. The Yuschenko Slowdown ............ 59 Conclusion ............................. ......................................................... 73 Sources Consulted .................................................................................. 76 ACKNOWIEDGIVlENTS This paper represents nearly one year of research and has been one l)rthe best academic experiences I've had at Colorado Collegc. However. it would not have been possible without the help of many people. First I would like to thank John Gould. my adviser and mentor over the past two years. Not only did he help me obtain the funding necessary to go to Ukraine and conduct much ofthe research for this paper. but I will forever be indebted to him for the patience and countless number of hours he provided me during the writing process. Secondly I would like to thank Sergei Pokhilko. Vitaly Andriyshin and Vasyl Prikordonniy for all their help during my research in Chaine. Without their guidance I could never have heen able to conduct all or lh~ inten'it'\\s that I needed. I would also like to thank Vlolly Gross. l'or devoting many days to helping me edIt and proolread this paper. I could never have preserved my sanity without her good humor and sound advice. Finally. I would like to thank my family fur helping me with finding accommodations in Ukraine and fi)l' supporting me in every way possible throughout the past year. Introduction After the collapse of the Soviet Union and its Eastern Block satellites, many international institutions expected rapid growth in Ckraine, The country's enormous agricultural and industrial output, highly educated population, and strategic location between natural-resource rich Russia and the rest of Europe almost guaranteed a much better quality of life for Ukrainians. In contrast, by 1999 the couutry's total economic output was at less than hal r its pre-independence level and millions of Ukrainians were struggling just to survive, Even more discouraging was the fact that political power became highly concentrated in the hands of Leonid Kuchma, a callous and self-serving executive wbo was unwilling to undertake tbe reforms needed to change the country's dire prcdicmncnt, According to prominent political economy theories, under such leadership Ukraine's economy should have continued to decline or at bcst to become stagnant. A corrupt and politically unopposed executive is likely to only continue transferring resources to family members and loyal supporters, thereby stining investment and other legitimate economic activities, Moreover, theory argues that the only way to reverse this trend is through a change of regime type and leadership, in which a more democratic and transparent government comes to power, In other words, before strong economic growth can take place the government must restore investor and business conlldence by severing illegitimate ties between corrupt ofticials and favored economic actors. In Ukraine these predictions failed to emerge, Firs\, during the last few years of the Kuchmll regime Ckraine experienced unpreeedentcd economic growth. Second, and even more puzzling. the countr),' s economIC gn)\vth rapidl) Jissipated \\-hen a 11101\.' transparent and less corrupt government replaced the Kuehma regime by way of a democratic revolution. Diagnosing Ukrainc's current economic predicament is not only important to the country itself but it is of key importance to other countries in the region and in the world, cspecially ones that might experience a similar transtormation li'om authoritarianism (i.e. Belarus, Russia. and many Central Asian countries). Accordingly. this paper answers three questions. Firs\, what are the reasons bchind Ukraine's initial post-independence economic decline'? Second, why did Ukraine experience a rapid and unexpected economic expansion during the last few years of the authoritarian Kuchma regime') And finally, why did economic growth quickly taper off in the wake of the 2004 "Orange Revolution?" This paper asscl1s that first, Ukraine's initial economic decline can be directly linked country's social and political conditions upon independence. A lack of political competition and the absence of a strong national identity led to the accomplishment of few economic retorms and to destructive governmental corruption. Second. the economic growth under the Kuchma regime cannot be largely attributed to beneficial actions of the Administration. Rather, the growth resulted from favorable external conditions and limited retorms enacted by relatively weak members ofKuchma's opposition. Finally, the economic slowdown after the Orange Revolution was largely caused by an unfavorable change in external conditions, along with the elimination of falsi lied exports and other Iflkc growth spawned during the Kuchma era. The slowdown thereforc does nO! disprovc the prominent theory and is not largely attributable to the new gO\crnment or to lTIOrC democratic factors. Chapter 1: Transition Theory In order to best understand why Ukraine did not nndergo a successful market transition alier independence, one must look at the predominant theory concerning the di fferent transition paths of the Eastern European states. Having suffered through decades of political repression and economic mismanagement, certain states like Poland. Hungary and the Czech Republic managed to develop liberal democracies and market economies much faster and more effectively than neighboring states like Ukraine. Belarus and Moldova. who are still years behind and. in some cases, making no progress. According to economic and political cxpel1s. there are three main reasons flJr the latter countries' not transitioning as successfully: a lack of initial political competition. the decision to undertake reforms slowly, and the onset of state capture. which exacerbated the previous two factors. Political ('ompelitiol1 The predominant theory concerning the development of a liberal democracy In former communist countries revolves around whether or not an organized opposition to the pre-transition government exists. and whether or not it is strong enough to take power. I If this is not the case. then the former regime will win the first elections and stay in power. retaining the ability to "control the process oftransition ... 2 Specifically. while taking on the task of replacing the old order with democratic institutions. " ... old rulers [also] attempt to block the entry of competing political and interest groups into the political arena.'" In this way the old rulers try to ensure their long-term, unchallenged, \;1 lada :\nna Vachudova, I:~lgm"s:"""UDd!vi\t~..Q (Ncw York: Oxford t:niversity Press, 20(5), PP- ~ g, :2]. : ib d .. 19. ; It d .. 19 3 tenure in power. The successful t(lfInation of a liberal democracy and the institutions associated with it thus hinge on the prior existence of hcalthy political competition. A good example of the need for initial political competition can be seen with Poland, currently considered one of the most liberal market democracies of the former Eastern Block countries. Solidarity, a powerful opposition group to the country's communist government, was first founded in I 980-nine years before the collapse of that regime. Although governmwtal reprisals forced it underground, the movement survived and Lech Waksa, its leader, was even awarded the Nobel Prize "for his efforts to gain legal recognition lor Solidarity and the right to civic selt~organization in communist Poland"" Solidarity was consequently organized and powerful enough to take over when the cOlnmunist government an1idst economic crisis in 1989. was {()feed to open up elections in the wake of mass demonstrations.' Moreover, the demise of the Polish communist regime encouraged the formation of other political groups, which prevented anyone group of people from obtaining unchecked political power. For instance, at one point President Walesa suggested that he be given special powers in order to carry out painful but necessary economic reforms. However, this idea was democratically rejected by a faction in Walesa's own party, comprised of"politicalliberals [who) believed that economic reform should !lot be implemented in such a heavy-handed manner that it jeopardized the development of democratic institutions. "h ft is the existence of initial political competition that allowed for a liberal democracy to consolidate in Poland, even when the initial leaders of Solidarity desired to turn to away ll'Oll1 it. ; !v1itchell A. Orenskin, ~,!JLu!Llh~~J~_£.~!, (Ann Arbor: University of Michig,U) Press . .20(1). ,J, \ Ibld .. 3. f, Ib!d .. 31-33. Poland's story also illustrates the biggest criticism of the theory that political competition and a liberal democracy are key to a country's successful transition, This criticism suggests that the very people and democratic institutions responsible for bringing to power a reform-minded