History versus Expectations in Contemporary Ukraine

Contemporary Ukraine UKRAINE was not just another constituent republic of the Former Soviet Union (FSU), indeed it was a very special one. This feature arose from its, quite unique, position of being both the bread basket and the industrial power house of the Soviet economy. Today, its economy is in the doldrums. There is little activity. The FSU having disintegrated, the Ukraine economy is integrated with the rest of the world, Ukraine is one of the economies of eastern Europe now attempting transition to a market-based system. The essential element in the transition to a market economy is that the private sector assumes the leading role in the economy. The task of bringing this about is substantial in an economy such as that of Ukraine which has little recent history of private enterprise in most sectors of the economy. Paradoxically, the role of government in fostering a vigorous market economy is non-trivial. This note is concerned with these issues. It is organised into four sections. The macro-economic environment is scanned first. Here it is observed that despite macro stability the Ukraine economy is mired in a decelerationist mode. Next the relative roles of 'history versus expectations' in determining aggregate economic outcomes is discussed. Following this, the sources of uncertainty in Ukraine today are outlined, though briefly. The intention is to suggest that uncertainty can stem from sources other than the macro-economic environment defined so narrowly as to contain the essential variables such as inflation and the exchange rate alone. Finally, some immediate macro- economic policy imperatives are noted. Among these is a move to much greater financial discipline on the part of government. Financial discipline has to be seen as something apart from the often encountered call for 'sound money., itself in turn to be dealt with by calling for (an attempted) control over monetary aggregates. In the situation under study it refers to the requirement that the government stick to its internal payment obligations and enforce its dues, the possible violation of which is overlooked. The paper is able to provide some evidence on budgetary arrears in the Ukrainian economy today and analyses the consequence of this for private sector behaviour.