Disappointing performance in Ukraine and other transition economics has led to charges that there has been too much emphasis placed (by consultants, advisors and donors) on cookbook recipes (liberalise, get prices right, impose hard budget constraints) and too little on sequencing and institu-tion building (see, for example, NANIVSKA, 1999).
Certainly, we subscribe to the view that investments in human capital, in particular in the form of training for young Ukrainians as future policy makers, have been under-emphasised. Fur-thermore, it is self-evident that institutions matter and that important policy implications can be de-rived using insights from institutional economics (see, for example, VOIGT & ENGERER, 1999).
However, we cannot, based on our experience in Ukraine, concur that institution building has been ignored by policy advisors who only have eyes for world market prices and balanced budgets.
Issues of corporate governance, management structures and transaction costs within the CAEs, the need to create a land market, as well as the importance of bankruptcy laws, transparent accounting systems and central credit registries for the development of rural finance systems; these topics and others have been central themes of the work of most of the donors and advisory groups in Ukraine that we have observed since at least 1995.
What of sequencing? The development of agricultural policy and the performance of the ag-ricultural sector in Ukraine since Independence leaves us quite sceptical as regards the practical im-portance of sequencing issues.
First, the informational demands associated with sequencing are daunting. Sequencing in-volves both the order in which reform measures are to be implemented and the timing or pace of these measures. While it may be possible to develop interesting theoretical models of optimal se-quencing, in practice the implementation of specific insights derived from these models will require
18 For a discussion of this problem in transition economies, see EBRD (1999, p. 102-114).
information on speeds of adjustment, exogenous factors and the incidence of costs and benefits etc.
that is not even available ex post let alone ex ante.
The speed with which ‘optimal’ price liberalisation should occur, for example, is likely to depend, inter alia, on nominal and real exchange rate developments and, in the case of tradable goods, on expected world market price developments. Both are essentially unpredictable. At the onset of the transition period in Eastern and Central Europe there was no way of knowing, for ex-ample, that grain and oilseed prices on world markets would explode in 1995-1996; and in the midst of this high price phase, few observers predicted that these prices would soon return to historical lows. As regards exchange rates, in 1997/98 we were witness to fascinating debates in economic and policy circles in Ukraine on whether the real exchange rate was under- or overvalued, and on the exchange rate elasticity of the production and trade of Ukrainian goods. Respected analysts could be found arguing that the Ukrainian Hryvnia was not overvalued in real terms and that, in any case, production and exports would not respond to a devaluation. While we now know better, this is of little comfort to anyone who might have been attempting to solve sequencing problems in 1997/98.
Second, the concept of sequencing is based on a rather naive conception of the political economy of transition. In this regard, we would like to raise several issues.
1. The idea of sequencing is disturbingly well suited to the mind-set of the proponents of con-tinued state planning and intervention in transition economies. It is only a short step from
‘sequencing’ to the ‘complex of detailed and interactive normative acts guiding the co-ordinated action of all organs and levels of state authority’ that these proponents often call for. Appeals for sequencing are often transformed into arguments for the maintenance of a large, intrusive state apparatus. The idea of sequencing might also suggest to some that it is possible to manage some type of ‘third way’ between or even beyond socialism and capital-ism for a prolonged period of time.19 In a sense, we are appealing to something analogous to the recognition that while market failure may provide a prima facie case for government in-tervention, policy failure can result if political economics and the distinction between neces-sary and sufficient conditions are ignored. It is of practical importance, when evaluating theoretical arguments for sequencing, to consider the (mis)uses to which these arguments might be put.
2. In practice it is unlikely that a government will be able to stick to a sequencing schedule.
More precisely, the longer the schedule, the more likely it is that resistance to reform will build as ‘losers’ become aware of the stakes, rent seekers ‘learn the ropes’, and politicians become attuned to the interests of both groups. This suggests that reforms should be imple-mented quickly. In the case of Ukraine it may have been possible to implement major re-forms in the heady weeks and months immediately following Independence; today vocal, en-trenched interests make even minor changes difficult. In this vein, BALCEROWICZ has stated:
“The first phase after the political breakthrough is a very important one. ... There’s a special atmosphere and much euphoria. People are willing to accept radical changes. ... [T]his first period is precious, because it can be used to launch as many painful changes as possible.
Whenever there’s a window of opportunity, one should use it, because later it may be very difficult or impossible.”20
3. If this is true, however, it is largely academic to worry about sequencing. The main consid-eration should simply be pushing as much as possible through a given, narrow window of opportunity.
19 KORNAI (2000) argues convincingly that, at least so far, a distinctive third way has not emerged.
20 BALCEROWICZ (2000). In the discussion that followed the presentation of this paper, BALCEROWICZ stressed that if he made one mistake during Poland’s so-called ‘big bang’ it was that he did not push through even more major reforms, that he instead worried about exceeding Poland’s capacity to adjust and thus decided that some reforms could wait un-til later.
4. It has been noted that simultaneity can increase the sustainability of reform (VOIGT &
ENGERER, 1999, p. 65). It is a characteristic of many reforms that they lead to significant losses for individual groups and rather diffuse gains for the rest of society. The more reforms are pursued simultaneously, the more these diffuse gains can accumulate to compensate indi-vidual groups for their losses.
Another argument for simultaneity is that many reform measures have the character of nec-essary but not sufficient conditions. The provision of credit to farms in Ukraine, for example, is unlikely to increase unless several conditions are fulfilled simultaneously. Farms must become prof-itable, which implies that a slate of measures directed at effectively liberalising markets and allow-ing the market-driven restructurallow-ing of farms to occur must be implemented. At the same time, lend-ers’ expectations that farms will repay must be increased, which implies steps to increase trust (a credit registry), transparency (internationally acceptable accounting practices), creditor protection (bankruptcy laws and courts) and the availability of collateral (a functioning land market). The im-plementation of any partial subset of these steps is not likely to lead to a significant improvement of the current situation; indeed, the implementation of some subsets could put farms under additional pressure, thus increasing their efforts to block reform. For example, lifting the moratorium on bank-ruptcies in Ukrainian agriculture without simultaneously pursuing effective market liberalisation would quickly lead to the majority of Ukraine’s farms being declared insolvent. Effective liberalisa-tion without lifting the moratorium on bankruptcy might increase farm profitability somewhat, but investment activity would remain at a low level.
One oft-cited sequencing guideline for transition economies is the rule that macroeconomic stabilisation is a prerequisite for successful, efficiency-enhancing structural change. Clearly, under conditions of five-digit inflation, entrepreneurs will not be able to make sensible decisions. How-ever, Ukrainian experience between late 1994 and the crisis in 1998 also suggests that preoccupation with macroeconomic stabilisation can detract from the need to also consider whether the ‘real’
economy is growing or perhaps still shrinking. In other words, macroeconomic stability can only form a thin, fragile crust over an economy that has not undergone meaningful structural change at the market and enterprise levels. Hence, while macroeconomic stabilisation is a precondition for structural reform, it is can be argued that even in this relatively clear-cut case, it would be more pro-ductive to think in terms of simultaneity rather than sequencing.
6 Conclusions
The contrast between perceptions of Ukraine’s agricultural potential and the desolate condi-tion of its agricultural sector today, roughly 10 years after Independence, is striking. It appears that policy failure is largely responsible for this contrast. An overview of agricultural policy develop-ments in Ukraine since Independence indicates that little market-oriented reform took place before late 1999, and that even after that date opponents of reform have been able to score important victo-ries. Initial conditions and the fact that agricultural policy in Ukraine is made by numerous poorly co-ordinated bodies have been major obstacles to successful reform. Since the perceived demands of nation-building were given a higher priority than economic reform in the first years of Independ-ence, a window of opportunity was missed. Powerful rent seeking interests have become entrenched and represent a major barrier to reform. As a result of our diagnosis, we are sceptical that problems with the correct sequencing of agricultural reform measures have played an important role. While sequencing is certainly of theoretical interest, we feel that in the environment that characterised Ukraine in the years following Independence, its practical importance was (and remains) limited by information constraints and political economic considerations.
7 References
ÅSLUND, A. (1999): Problems with Economic Transformation in Ukraine. Paper presented at the Fifth Dubrovnik Conference on Post-communist Economic Transformation, June 23-25, 1999.
BALCEROWICZ, L. (2000): HIID/CASE Economic Policy Seminar, HIID (Harvard Institute for International Development), Kyiv, March 23, 2000.
EBRD (European Bank for Reconstruction and Development) (1999): Transition report 1999: Ten years of transition. EBRD, London.
HAVRYLYSHYN, O. (1994): On the Political Economy of Trade in Ukraine. In: MICHALOPOLOUS, C.
D. & TARR (eds.): Trade in the New Independent States. The World Bank, Washington D.C.
HOFFMANN, L. & A. SIEDENBERG (1997): Aufbruch in die Marktwirtschaft – Reformen in der Ukraine von innen betrachtet. Campus Verlag, Frankfurt a.M.
JOHNSON, S., D. KAUFMANN & A. SHLEIFER (1997): The Unofficial Economy in Transition.
Brookings Papers on Economic Activity, 2: 159-239.
KORNAI, J. (2000): What the Change of System From Socialism to Capitalism Does and Does Not Mean. Journal of Economic Perspectives, 14: 27-42.
MELOTA, I. (2001): The Shadow Economy in Ukraine: Measurement Problems. Institute for Economic Research and Policy Consulting, Kyiv.
NANIVSKA, V. (1999): What went wrong with foreign advice in Ukraine? In: Kyiv Post, December 9, 1999, Kyiv.
SIEDENBERG, A. & L. HOFFMANN (eds.) (1999): Ukraine at the Crossroads: Economic Reforms in International Perspective. Physica-Verlag, Heidelberg.
STATE COMMITTEE OF STATISTIC OF UKRAINE (annual): Agriculture of Ukraine, Statistical Yearbook, Kyiv.
STRIEWE, L. & S. VON CRAMON-TAUBADEL (1999): Die Getreideproduktion der Ukraine: Verpaßte Chancen und dringender Handlungsbedarf. In: VON CRAMON-TAUBADEL, S. & STRIEWE, L.
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3 Agriculture and Current Account Sustainability in Ukraine
1SERGIY ZORYA
1 Introduction
The Soviet Union was always considered a large and almost closed economy. It was large due to its substantial influence on world market prices, and closed due to its orientation mainly on inter-republic and CMEA trade. After Independence in 1991, Ukraine became a small open econ-omy, in other words, a country that has little influence on international prices, and that imports and exports significant quantities of goods, services and capital.2
There are, broadly speaking, three reasons for discussing the policy implications of an open economy. First, policy makers need to understand the environment in which they operate. An open economy faces various external and internal shocks almost every day. Ukrainian policy makers must come to grips with changes in the world price for oil or world financial crises, just as their col-leagues in other countries. Second, policy makers need to make judgements as to where the econ-omy is moving – whether opportunities are opening up or closing down. Third, policy makers need to make decisions. Moreover, these decisions have to be made taking into consideration possible reactions in the rest of the world, for example, investors’ sentiments. For each of these reasons, it helps to know something about the main relations and mechanisms of an open economy (D ORN-BUSCH, 1988).
The current account plays a central role in the macroeconomics of an open economy. A sus-tainable current account ensures a ‘healthy’ environment for the whole economy; an unsussus-tainable current account often leads to financial crises. Ukraine has already suffered from a financial crisis in mid-1998.3 The entire economy and the population were severely affected by this collapse. Slow structural reforms together with weak budget discipline and political instability were considered to be the main roots of that crisis. Agricultural policy, too, was strongly responsible for weakening the sustainability of the current account leading up to that crisis.
There is no simple rule that can help to determine whether or not a current account deficit or surplus is sustainable. ROUBINI & WACHTEL (1998) propose a number of indicators of current ac-count sustainability for transition economies. Moreover, in a range of studies on ‘early warning’ pre-crisis indicators, and macroeconomic vulnerability current account sustainability plays a very impor-tant role. The analysis of current account sustainability in Ukraine in this chapter is built on these studies.
This chapter addresses the issue of the current account sustainability in Ukraine with implications for agricultural policy-making. The goal is twofold: first, to improve the knowledge of policy makers in Ukraine regarding current account sustainability; and second, to explain the impor-tance of sectoral linkages to agricultural policy makers so that their decisions harmonise with econ-omy-wide priorities. The paper is structured as follows. First, the term ‘current account’ and its sus-tainability are introduced. Second, methods for the analysis of current account sussus-tainability in tran-sition economies are discussed. In the fourth section, current account sustainability in Ukraine is assessed. Section five deals with the impact of macroeconomic crises on agriculture first, and then, the effects of agricultural policy on the current account’s ‘health’. The sixth section summarises the resulting suggestions for agricultural policy makers in Ukraine.
1 I am very grateful to Ulrich Thießen for his helpful comments.
2 It is more accurate to say that at the moment capital imports are relatively free in Ukraine, but capital exports are strictly controlled.
3 One could add the mini-financial crisis in the autumn of 1997 as well.