УДК 336.7: 519.8 T. Tokarchuk, H. A. Bartelet UNLEASHINg UKRAINE’S ECONOMIC POTENTIAL: MACROECONOMIC Multipliers FROM A FEEDBACK PERSPECTIVE The purpose of the research is the empirical analysis andelaboration of the system dynamics approach to define and estimate the key drivers of the future macroeconomic stabilization and economic potential of the Ukrainian economy. The study used thegeneralization, systematization and grouping of data, meth- ods of system analysis and synthesis as well as the system dynamics methods and models. Research results. The analysis of the development of the Ukrainian economy in comparison to the Polish economic situation has been completed. We confirmed the hypothesis that many of the initial eco- nomic problems in Ukraine – such as a low aggregate demand and export competitiveness – have been the cause of the exchange rate regime. Elaborated system dynamics models not only allow to analyze the feedback structure of a national economy but can also be used to verify the effectiveness of the different implications for the economic policymaking in Ukraine in the coming years. The results of this paper are mostly exploratory and need further, deeper research before conclusions can be used for policymakers in order to elaborate the economic strategy which leads to improvement of the economic potential of Ukraine in the short and long run. Conclusions. Based on the empirical analysis conducted on the realization of the two types of the system dynamic models with the focus on explaining the interrelationships between domestic consump- tion, aggregate demand, inflation, export competitiveness, and exchange rate fluctuations, it was shown that although the currency peg has had a positive impacts on Ukraine’s energy imports, many of the other economic problems in Ukraine, such as a low aggregate demand and export competitiveness, have had place. It was also confirmed that the passage to flexible exchange rate regime is one of the important drivers of the economic potential and the competitiveness reinforcing as well as achievement of macro- economic stabilization, especially in the long run. Keywords: economic policy,macroeconomic stabilisation, macroeconomic indicators, exchange rate regime, system dynamics methods JEL classification: E17, E52, C15, C53 Introduction and research problem. After dec- problem concerns the passage to flexible exchange ades of being a relatively unknown country among regime instead of fixed one by National bank of European and American policymakers, Ukraine has Ukraine.This can be consider as the effective mac- become one of the most bespoken countries within roeconomic driver of the economic and financial Europe and the world in recent years. Unfortuna- stabilizationalso need of the deeper investigation tely, most of the attention has quite a negative cha- and improvement with using of the adequate math- racter, including the economic situation, migration ematical tools including system dynamics methods. problems, macroeconomic instability, and increas- Resent publications analysis. The problem of ing corruption in the recent time. What is still lack- the economic potential and perspectives of the eco- ing is fundamental knowledge about the country nomic growth for the emerging countries as well as itself, among others about its economy, especially a discussion about different kinds of the exchange about its economic potential and perspectives of the rate regime as the macroeconomic driver for differ- macroeconomic stabilization. This is why analysis ent countries in different periods of their economic of the main challenges and opportunities that development has been investigated by many foreign Ukraine has faced in recent years and will face in and Ukrainian researchers, including O. Faryna, the years to come as well as the investigation of the Y. Gorodnichenko, G. Roland, D. Romer, M. Schni- key factors of the future macroeconomic stabiliza- tzer, V. Heits, I. Lukianenko, V. Melnychuk, S. Ni­­ tion and economic potential still very important for kolaychuk, L. Shavalyuk, S. Shumska, M. Skryp- further deeper research. The other popular discussed nychenko, and others [1–4, 7–10]. It should be © T. Tokarchuk, H. Bartelet, 2018 108 ISSN 2519-4739 (print), ISSN 2519-4747 (online). НАУКОВІ ЗАПИСКИ НаУКМА. Економічні науки. 2018. Том 3. Випуск 1 16000 behind. Figure 1 shows the GDP per capita in both Ukraine and Poland 14000 from 1992–2017. 12000 Having gained independence from 10000 the Soviet Union in 1991, Ukraine 8000 expectedly had large problems in 6000 transitioning from a mostly cen- 4000 trally planned economy to a mar- 2000 ket economy. This led to a period 0 of ‘hyperinflation’ in 1992–1993 followed by the largest economic 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 downturn in the history of Ukraine Poland, GDP per capita, US$ Ukraine, GDP per capita, US$ (real GDP fell by 23 percent in Fig. 1. GDP per capita Ukraine vs. Poland during 1992–2017 1994) [7, p. 8]. In August 1996, (Source: WEO database, IMF) Ukrainian Hryvnia was introduced as the official national currency in mentioned that most of foreign scientists in their Ukraine with the exchange rate of around 2 Hry- researches have been focused mainly on the devel- vnia/US$. In 1998, due to the combination of fis- oped countries, as well as on the emerging countries cal crisis, a slowdown in structural reforms, and with economic growth faster than Ukrainian econo- a decreased investor confidence in emerging mar- my [2, 8]. The investigation of the Ukrainian scien- kets following the Russian and Asian economic tists in many cases was based on complicated macro- crisis, the Ukrainian hryvnia devalued and its econometrics models aimed to estimate the relation­­ - exchange rate fell to around 5 Hryvnia/US$ in ship among the macroeconomic indicators in diffe-­­­ 2000. Combined with the general worldwide eco- rent sectors of Ukrainian economy. These papers nomic upturn following the Millennium (i. e. the have been mostly focused on the scenario analysis of year of 2000), the devaluation of the hryvnia led to the behaviour of the whole economy with the objec- a growing competitiveness of the Ukrainian econ- tive to elaborate the most effective strategy of the omy. Profits of export industries (mainly steel macroeconomic stabilisation under rising external and machineries) soared, and the real GDP growth and internal risks and political shocks under different reached +9 % in 2001. On average, Ukraine recov- exchange rate regimes [3, 10]. ered 8 % of GDP growth per year between 2000 Unsolved parts of the problem. The analysis and 2004. This was higher than in Central and of the research papers of Ukrainian and foreign Eastern Europe (including Poland) where the aver- researchers has shown that the elaboration of an age growth was around 4 % per year. However, as adequate model to confirm the necessity of intro- can be inferred from Figure 1, Ukraine’s growth ducing a flexible exchange regime as an important came from a much smaller base than that of, for driver of the financial stability and economic growth example, Poland. In 2000, the Ukrainian govern- continue to be very significant. ment also made the decision to (administratively*) Research goal and questions. The purpose of peg the value of the hryvnia to that of the US$, at the research is the empirical analysis of the key fac- the exchange rate of 5 hryvnia/US$. When macro- tors of the future macroeconomic stabilization and economic conditions worsened in Ukraine in 2005 economic potential of the Ukrainian economy, as and its GDP growth decelerated. Because of the well as elaboration of the system dynamics model- peg of the hryvnia to the US$, the exchange rate of ling to prove the hypothesis that many of the initial the hryvnia was not able to reflect the worsening of economic problems in Ukraine, such as a low aggre- Ukraine’s competitive position [7]. Figure 2 shows gate demand and export competitiveness, have been how Ukraine’s current account rapidly worsened a cause of the exchange rate regime. in 2005, mainly as the result of the uncompetitive Main findings.The estimation of Ukrainian most exchange rate of the hryvnia. Another reason for effective macroeconomic multipliers is interesting in the imbalance was the rapid increase in foreign comparison with other emerging countries with simi- capital inflows after the “Orange Revolution” in lar starting conditions. As a country from the former 2004, which led to growth of consumption imports Soviet-block, Ukraine is best compared to Poland in financed by the debt capital. terms of its size, population, and development. If we compare economic progress in Ukraine with that in * The official term was a ‘managed floating exchange rate’, but Poland, it becomes clear that Ukraine is currently far in reality the exchange was not really allowed to float. T. Tokarchuk, H. A. Bartelet. Unleashing Ukraine’s Economic Potential: Macroeconomic Multipliers from a Feedback Perspective 109 This situation continued until 15 the financial crisis of 2008, when the peg to the US$ was finally de­­ 10 valued to around 8 hryvnia/US$. This devaluation eventually did not prove strong enough. Following the 5 Ukrainian revolution of 2014, the political turmoil led to a shortage of 0 foreign exchange reserves coupled with a loss of financing from both the Russian Federation and interna- -5 tional markets. The political shake- up and severe confidence crisis -10 caused a sharp reversal in private capital inflows in 2014. In these cir- cumstances, access to the external -15 capital market by the private sector 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Poland, current account balance, % GDP Ukraine, current account balance, % GDP was effectively closed. The level of international reserves fell to a cri- Fig.