Paths for Ukraine.

Economic and Political Choices for the Next Century

The fall of the Soviet empire and the post-Soviet economic transition are undoubtedly the most crucial events of the last decade of the twentieth century. Ukraine, the largest East European country, has been a key participant in this

However, only a small amount of attention was paid in Western political literature to Ukrainian problems and to their significance in the context of mainstream economic and political theory. Recently, two books have been published that aim to bridge this gap: Economic Interdependence in Ukrainian-Russian Relations by Paul J. D'Anieri and Ukraine: At the crossroads: Economic Reforms in International Perspective, edited by Axel Siedenberg and Lutz Hoffmann. The authors of these two books, who are personally engaged in research on Ukrainian political economy, try to highlight Ukraine's economy as a special case in the process of post-totalitarian transformation. Interestingly enough, the dilemmas that are considered in one book find their solution in the other.

D'Anieri constructs his analysis of economic relations between Ukraine and Russia around three dilemmas: prosperity versus autonomy, prosperity versus sovereignty, and autonomy versus sovereignty. The key feature of these relations is "interdependence," and the consequences are measured in terms of the sensitivity and vulnerability of Ukraine to dominance by its eastern neighbor.

This approach allows the author to involve both the older realist and newer liberal doctrines in defining Ukrainian-Russian relations. D'Anieri describes these relations as "asymmetric interdependent," a relationship in which Ukraine trades with Russia for essential goods and markets; Russia's size makes it inherently powerful; Russia's intentions are suspect but Ukraine has few cheap substitutes; and Ukraine is unable to mobilize its society to reduce its vulnerability. While this analysis is accurate, D'Anieri uses it to press a much more debatable and surprising point. He argues that restoring Ukraine's trade with Russia within the Commonwealth of Independent States (CIS) to the levels reached during the soviet period will lead to prosperity and economic efficiency in Ukraine. What D'Anieri argues, however, amounts to a quasi-total dependence of Ukraine on one trade partner. In 1991, for example, 85 percent of Ukraine's total exports went to Russia. Contrary to D'Anieri's position, such dependence would o nly increase Ukraine's vulnerability and insecurity.

According to neoclassical theory, economic integration can be effective only when the industrial structures of the two participants are mostly similar and competitive, not complementary as in the case of Ukraine and Russia. An illustration of the Russo-Ukrainian economic partnership is provided by the metallurgic industry. While mineral inputs from Russia are used in the manufacturing industry in Ukraine, the products of this industry are not exported to Russia. This type of unilateral trade induces little progress in Ukraine. Trade is efficient only when it causes the diffusion of technology and therefore substantially increases the productivity of the industry. These features are absent in trade within the CIS, hence the very low economic success of Ukraine's integration in this region.

D'Anieri gives a good illustration of Russia's strong wish to preserve asymmetric economic interdependence with Ukraine by describing the energy war of 1993-94, which has resurfaced in the last year. Power politics is a suitable concept in analyzing economic relations in the post-Soviet space. Economically, however, both Ukraine and Russia will win much more by expanding their relations with the EU and other OECD countries. While such integration into the world economy is not the easiest option, it will help both Ukraine and Russia recover their economies. Only then will their mutual trade achieve a more efficient pattern.

Along with his treatment of Russo-Ukrainian relations, D'Anieri also analyzes the internal problems facing Ukrainian society, including social, political, institutional, and power divisions, and their impact on Ukraine's economic vulnerability. This analysis could be better integrated with the rest of the book if it incorporated the concept of structural power in relations between the "former metropolis"--Russia--and its colonies, such as Ukraine. Overall, the author's main contribution is his explanation of Ukraine's present situation, as it stands at the crossroads between "bandwagoning" and choosing an independent existence in the new Europe.

The most effective economic strategy for Ukraine is the topic of a second book, Ukraine at the crossroads: Economic Reforms in International Perspective. The book is divided into five chapters, each dealing with a different economic problem. The authors are representatives of the German Advisory Group in Ukraine and of the IMF. In the first part of the book Oleh Havrylyshyn, Ivailo Izvorski, and Ron van Rooden consider economic growth on the basis of the Schumpeterian concept of "creative destruction." Fast structural reforms are the requirements for successful economic performance in the post socialist countries, and not merely the simple accumulation of capital and labor. The empirical analysis confirms the frequently expressed view that restoring growth in Ukraine requires advances in broad-based structural reforms as well as a reduction in the role of the government in economic life.

A compelling supporting argument is presented in the article by Alex Sundakov of the IMF. The article's main idea is that since independence, Ukraine has clearly lost its way by going almost to the limit of short-termism. It is now essential to refocus on the medium term. In this context, Inna Lunina and Volkhart Vincentz criticize the direct and indirect subsidization of enterprises in Ukraine. The fact that a considerable portion of subsidies supports the least productive sectors such as coal mining, or that subsidies serve as a barrier to competition as in agriculture, interferes with long-term economic planning. Christian von Hirschhausen clarifies the situation in describing the gas sector, the most vulnerable sector of the Ukrainian economy. He emphasizes the monopoly structure of this sector and therefore the unrealistic high price of gas in the internal market. Delays in economic reform resulted in the flourishing of such phenomena as subsidization, high monopoly power, and inefficiency, all of which have their roots in the former socialist economy. To solve these problems, Von Hirschhausen proposes a pln of gas rationalization.

Building a civil society, implementing structural reforms, and reorienting its international trade will be the crucial tests for Ukraine's economic and political stability. This stability in turn has a crucial impact on European security. These two works serve to explain why difficulties occurred in transforming Ukrainian society and policy. They may also help Ukrainian politicians avoid strategic mistakes in the future. Most importantly, these books combine ideas born from practical, inside observation with the modern concepts of economic and political theory.

YURIY BILENKO is Associate Professor ar Ivan Franko National University in Lviv, Ukraine and Visiting Fellow at Yale University.