This article is part of ECFR's Wider Europe Forum
On the eve of the parliamentary elections, and quite apart from the war in the east, the current economic situation in Ukraine is dire.
On the eve of the parliamentary elections, and quite apart from the war in the east, the current economic situation in Ukraine is dire. The economy has entered recession and projected GDP growth is negative. Systemic corruption has not been addressed and the problem of energy security remains unresolved. The foreign exchange market is turbulent, which has hit the banking sector hard. The capacity of the executive continues to be extremely limited: incompetent bureaucrats populate most of the offices and their incentives are not aligned with those of the public.
The rhetoric of the parties running for parliament has focused on a number of political and economic issues. The most polarising ones are the country’s aspirations to join the EU and NATO, the status of the Russian language, and the investigation of murders on the Maidan and in Odessa (and elsewhere). Joining the EU is a stated objective of several of the parties who are likely to do well in the elections. This suggests that the prospect of joining the EU, however unlikely accession might actually be, could serve as a powerful tool for influencing elites in Ukraine. The other issues have few proponents, so most parties avoid taking a specific position on them.
It is particularly troubling that no major pro-EU party has mentioned in their programmes the importance of conducting an independent investigation into the events in Kyiv and Odessa, even though the Communists and pro-Yanukovych “Opposition Bloc” have done so. Many party platforms continue to appeal mainly to different regions or ideologies, so reconciliation between the various sides is unlikely. As a result, foreign powers and reactionary elements within Ukraine will continue to have plenty of opportunity to stir up trouble whenever they like. This will severely limit Ukraine’s capacity to conduct the much-needed reforms that would threaten vested interests.
Other issues that have been important in the electoral campaign include the nationalisation of the assets of oligarchs who support the old regime, lustration, the situation in the Donbas and Crimea, deregulation, decentralisation, and anti-corruption measures. Surprisingly, once the populist language is stripped out, most parties actually agree on the institutional changes that are needed. There is strong support for deregulation, decentralisation, anti-corruption measures, and judicial and other reforms. If these reforms go through (and some remarkable laws have already been passed by the old parliament), they may transform Ukraine into a more democratic and less corrupt country. Nevertheless, these reforms will be opposed by vested interests within and outside the state. The success of reform will hinge on the degree of pressure applied by civil society and by the West.
The economic situation is less rosy. While most parties claim to have liberal economic ideologies, many of them are populist and protectionist. They talk about supporting domestic producers, propping up the coal industry, and providing subsidies to various industries. This seems to be a dubious objective. Ultimately, Ukraine’s success depends on how quickly and deeply it can integrate into the world economy and make good use of the Association Agreement that it recently signed with the EU.
Many parties believe that a managed float of the exchange rate is the way to go. However, this is not possible in the short run, since Ukraine’s central bank does not have enough resources to credibly commit to such a policy. And neither would it be desirable in the long run. Ukraine’s trade structure is such that it really depends on commodity prices and Kyiv must let the exchange rate absorb external shocks.
Another polarising question is the market for land. Many parties suggest adopting surrogates for such markets, but this would be ill advised. Ukraine must exploit its comparative advantage in land by investing in agribusiness. But it will be practically impossible to obtain the investment needed unless land is a liquid commodity that can be used for collateral. Several parties suggest that infrastructure and natural monopolies should be nationalised. It is hard to see a clear economic rationale for this move.
The bottom line is that beneficial institutional reforms in Ukraine are likely, while economic policy may well continue to be a mess. In the short term, Ukraine will need a lot of help, but if institutional reforms go through and a decent political competition persists, Ukraine could emerge from the present crisis quite well. The major danger is that the new political forces may consolidate too much power and use it to extort resources and suppress any opposition – just like the old regime. Ukrainian democracy is fragile and all possible measures should be taken to support it. Maintaining healthy political competition and pressure on the government is essential, regardless of the economic situation in the country.
Yuriy Gorodnichenko and Tymofiy Mylovanov are board members of VoxUkraine, a portal that promotes research-based policy analysis on Ukraine.
The European Council on Foreign Relations does not take collective positions. This commentary, like all publications of the European Council on Foreign Relations, represents only the views of its authors.