Ukraine's Dire Economic Situation, Explained
To appreciate Ukraine's predicament, consider these charts.
Ukraine is back in the news. The country's conflict with Russia, which has been ongoing since 2014, is heating up again. There is a real possibility that Russian dictator Vladimir Putin will try to grab even more Ukrainian territory in the months to come. The Russians are suffering from an economic downturn caused by Western sanctions and a fall in the price of commodities, and Putin might try to shore up electoral enthusiasm for his party by appeals to nationalism.
In large part, Ukraine is vulnerable to Russian expansionism because it is poor and cannot compete with its better-armed eastern neighbor. And Ukraine is poor because it has failed comprehensively to reform its communist-era economy after the fall of the Berlin Wall in 1989 and dissolution of the Soviet Union in 1991. To appreciate Ukraine's predicament, consider the charts below.
Ukraine's economic reforms started quite late and fell far short of economic reforms in other parts of the former Soviet bloc. Today, Ukraine's economic freedom is similar to that of Ghana and Burkina Faso.
Without adequate economic reforms, Ukraine's income adjusted for inflation and purchasing power parity has declined by 30 percent since 1989. Contrast that with Poland, which has clocked in a respectable 119 percent increase.
Ukrainian life expectancy tells a similarly depressing story. With growing incomes, Estonia and Poland improved their healthcare systems, and saw their life expectancies increase by 13 percent and 15 percent respectively. In Ukraine, it rose by a paltry 4 percent between 1989 and 2015.
State control of the economy proved to be a breeding ground for corruption—with politically connected "industrialists" snatching the most profitable companies in return for financial donations to their political masters. (Note that the Corruption Perception Index and World Bank's rule of law index start only in the mid-1990s, by which time Poland and Estonia already undertook many economic and political reforms.)
The incestuous relationship between Ukraine's businessmen and politicians has retarded institutional development in the country. Today, the rule of law and democracy lag behind most other nations, including Poland and Estonia.
For more on the interaction between economic freedom and institutional development, please see www.humanprogress.org as well as my Cato Institute paper on 25 years of economic reforms in ex-communist countries.
