Custom essays on The impact of poor governance and institutional arrangements on the economic development in Ukraine

At first, the government of the newly formed state did not even identify specific goals and means for preventing the recession, and reduced the problem only to making necessary structural changes with subsequent stabilization and growth (Nickel 1151-1166). According to recommendations of foreign experts, the mechanism of state regulation was initially aimed at the catalysis of economic collapse process, rapid escalation of commodity production value and the continuous hype of devastating inflation and payment crisis. This created the most favorable conditions for the emergence and financial beneficiation of the new social structures together with the increase of gap in living standards between the rich and poor (Tiffin 1-29).
Speaking more precisely, having obtained the state independence Ukraine occurred in a situation of economic and legal anarchy. Hindering the stabilization and development of commodity production and even encouraging its decline, monetary, banking, financial, tax and pricing policies of “hyperinflationary shock”, which was formed under the active outside influence, contributed to the enrichment of the ruling minority – an economic pillar of the new order (Williams 331-345). Moreover, this process took place not through the activization of sound entrepreneurship and promotion of high-performance labor, but through primitive despoliation of the state, speculation over its commodity resources, utilization of emission and inflationary boom, dollarization of currency circularization for various financial manipulations, i.e. through the criminogenic instruments (Zon 78-82).
Serious blunders and lack of knowledge in the implementation of effective socio-economic policy hyped the destruction flywheel, so that it is still difficult to stop its inertia today. The worsening of socio-economic difficulties, elimination of real motivation for creative work and injustice were the basis of the outburst in crime, decline of morality and spirituality, reluctance of honest and high-performance work and living on self-earned income.
In addition, Ukrainian legislation guarantees a great variety of diverse and almost safe ways of illegal enrichment. Shadow outflow of Ukrainian currency is much higher than its inflow into Ukraine, which turns the country into the investment donor for economically developed Western countries. The dollar exchange rate was artificially exaggerated on Ukraine’s domestic consumer market. There was an intensive process of dollarization of the national monetary circulation. Because of this, the country was losing its foreign exchange resources, which actually undervalued the cost indicators of GDP (Sen 173-81). The effect of this factor not only increased the state of crisis, but became the cause and consequence of commodity intervention of Ukrainian commodity producers’ competitors, who were supplanting national producers from their own domestic market.
In these circumstances, the attempts to enhance the growth of GDP and GNP gave the opposite result. Under the guise of transition to market economy, national commodity production was brought by the monetary policy, first, into a kind of hibernation, and further, into the subsequent decline. The opportunities for timely cross payments and even ordinary market acts of purchase and sale were lost in almost all industrial and social spheres (Sen 173-81).
Payment transactions were also negatively impacted, on the one hand, by the rapid rise in product prices above the fair value of production and sales by producers, and on the other hand, by the lack of adequate banking and financial regulation and supervision over monetary circulation, balance of price movement and paying capacity, by the absence of rigid payment discipline. The analysis of price trends for 100 basic products of industry in Ukraine didn’t show a single case, when the level of prices for any product remained unchanged (i.e. stabilized) or decreased (Maksymenko 75-99). Simultaneously, Ukraine was involved into the process of reducing the purchasing power of the majority of consumers with their increasing underrun from the growth of consumer prices level, which caused the paralysis of the processes of expanded reproduction and the economic circulation.
Thus, the processes of industrial decline, as well as non-industrial growth of production costs and wholesale prices are the decisive factors in the general economic instability and fueling the inflation. The change of wholesale prices and circulation costs directly influences the ratio of market supply and demand, creating the levels of retail prices for the consumer market. The rates of previous inflation, increased deficiency and increased prices for resources still continue to hype the process of depreciation in Ukraine.
The Vice-Premier Sergey Tigipko at the investment conference in March 2010 spoke about the problems of Ukrainian economy, which showed the 15% fall in GDP, and 21,9% fall in industrial production; the banking sector increased the problem assets in 3,9 times, and fixed investment fell almost by 44%. In general, the economic situation in Ukraine is characterized by the following main points:
1. The restructuring of Ukrainian economy. Its main focus is the transformation of economic structure with the dominant high-technology industries (above all, engineering) into the dominant raw material industries. Although the mentioned deformations in the structure of the economy provided the industrial growth in Ukraine in the second half of 1999, getting rid of the ballast companies that reduced the production volume in recent years (the first half of 2000 showed the 12% industrial production growth and 4,5% GDP growth), these structural deformations do not provide the stability of production growth. The livelihood of the Ukrainian enterprises greatly depends on the situation on the world markets, which the Ukrainian government cannot control. The domestic market, despite some signs of revival after the fall of the national currency, remains extremely unattractive.
Besides, as it has been mentioned, the structure of the national economy of Ukraine is deformed by regions – 80% of the GDP is produced by five regions – the city of Kiev, Donetsk’s, Dnipropetrovs’k, Luhans’k and Zaporizhzhya (Bubnova 112-16).
2. The lack of investment resources for industrial upgrading. Today Ukraine faces the problem of finding funds for the development of industries and creating new jobs. Meanwhile, more recently there has been some increased investment in Ukrainian industry from domestic investors, who return their money from offshore, having believed in the prospect of relative political stability in the country. The need to attract foreign investment also makes Ukrainian economic policy extremely sensitive to outside influences (Williams 331-345).
3. The crisis in the fuel and energy complex. Since the Ukrainian economy to a great extent consists of energy-intensive industries, last year Ukraine consumed more Russian gas than Germany. Consuming large amounts of natural gas, Ukraine falls into direct dependence on Russia.
4. The explicit problem of the external debt. By 1.06.2000 it made more than 13 billion U.S. dollars. More than half of it falls on Russia and other CIS countries, and the remaining amount consists of borrowings from international financial institutions and private investors (Zon 90-101).
5. The relative financial stability. It is explained by the favorable foreign trade conditions for export production, which contributes to the inflow of foreign currencies;
6. The incompleteness of privatization and land reform. Ukraine retains state ownership of many large industrial facilities. Private property in Ukraine is still not an indefeasible institution. Agrarian reform which began in Ukraine at the beginning of 2000 is worth special mentioning. Today, the collective agricultural enterprises in Ukraine are actively dissolved and new private agribusinesses are created on their base. This gives an impetus to the redistribution of land market in favor of Ukrainian financial industrial groups. Land in Ukraine today is becoming one of the most marketable commodities (Maksymenko 75-99; Yekelchyk 382-83).
7. The payment crisis. It is a result of inappropriate monetary policy of the country’s leadership aimed at restricting the money supply in circulation, and the presence of influential institutions interested in creating the non-payment economy. The impact of the Government to such structures, the prohibition of all non-monetary forms of payments in the energy sector, as well as some liberalization of monetary policy has given certain results. The share of cash payments on the market increased markedly.
In the energy sector, for example, the proportion of cash payments in August 2009 was 60%, although it did not exceed 5% in the beginning of the year (Maksymenko 75-99). We believe that strong measures of the government gave good results only in those areas where consumers were able to pay, but for some reason did not pay before.
8. The state’s attacks against the shadow economy and private enterprise. According to the statistics, in Ukraine today there are not many businessmen working legally, just 4 business entities per 1000 people. In fact, there are many more real entrepreneurs: approximately every third citizen of Ukraine. This is not only because of high level of taxation of legal businesses, but also due to the discriminatory policies of tax administration: a legal owner is often subjected to endless inspections by various authorities, making the business unprofitable (Nickel 1151-1166).
Adoption of a new tax code, which further tightens sanctions against tax evaders and the shadow economy, is unlikely to lead to a significant increase in the number of legitimate businesses, but will contribute to a sharp narrowing of the scope of “shadow businesses”. Taken together, all this will lead to an aggravation of social problems in the society, the narrowing of the internal market and will make it difficult for the population to adapt to extreme conditions of life. Eventually, Ukrainian economy will become even more sensitive to adverse external factors.
In the understanding of economic processes now taking place in Ukraine the main role is played by the institutional analysis because many economic problems in Ukraine have institutionalized nature. There are four major institutions that determine economic situation in the country: the government, financial industrial groups (in other words, clans of oligarchs), large companies not belonging to the two abovementioned institutions, and the subjects of the shadow economy, as well as small and medium business.