Contribution to International Economy

  • The Economy of Ukraine
The Economy of Ukraine

General overview 3
Factors that hinder development of the Ukrainian economy 5
Actions taken by the Ukrainian government 8
Conclusions 10
Bibliography 11
 
1. General overview

Since moving into a market economy, Ukraine has faced many problems which have threatened its very existence. High unemployment, inflation, a lack of money to pay for social and economic programs, the effects of the Chernobyl nuclear disaster, and an overall slow move to a free market economy have combined to cause great poverty and suffering for the Ukrainian people. 
Ukraine has tremendous economic potential. The vast mineral resources within Ukraine, which includes large reserves of coal, iron-ore, manganese, bauxite, titanium, and salt, allow for a large industrial base to be established. As a result of the vast resources available, the Ukrainian economy is highly industrialized, with industry accounting for more than 40% of the countries net material product, and 25% of the total employment.
Ukraine is also heavily reliant on its agricultural background as a key part of its economy. The total amount of arable land within Ukraine amounts to 40, 782, 000 hectares. The "bread basket of Europe" is a major exporter of wheat, sugar beets, potatoes, sunflowers, and flax. In total, agriculture accounts for 30% of the NMP, and 25% of all employment.
Ukraine is also a huge producer of energy, though it is still heavily dependent on other CIS states for much of its oil and natural gas needs. Coal accounts for 30% of the nation's energy output, while nuclear power, having been downscaled since the Chernobyl disaster, accounts for only 25%. The rest of the required energy is brought in from Russia and Belarus. 
The Ukrainian economy currently has a GDP of $92 590 million, which is constantly rising with the growing amount of export goods being shipped abroad since the market was opened up. The main exports of the Ukrainian economy are ferrous metals, engines, equipment, appliances, chemicals, minerals, and vehicles, which totaled 74% of total exports. The major imports are oil, gas, oil products, automobiles, and plastic and rubber products. 
 
2. Factors that hinder development of the Ukrainian economy

Despite the huge amounts of natural resources possessed by the country, Ukraine entered the post-USSR era in a mess. A huge national debt, mixed with a heavy reliance on other nations for energy, and the political instability within the country during the move to a market economy has put a tremendous strain on the Ukrainian economy. 
One of the main causes of the huge national debt of Ukraine is its reliance on imported fuel. The reliance on foreign fuel was so high, in fact, that Ukraine had a trade balance of $-1 billion annually, while the national debt rose an average of $5.5 billion dollars a year during the early 90's. The huge debt, which resulted due to poor government decisions, a lack of foreign trade, and the reliance on foreign energy sources, created a desperate situation for many citizens.
The situation during the early 90's was so desperate that many workers haven't been paid for months, sometimes years. Ukrainian miners alone are owed a total of $367 million.
The Russia–Ukraine gas disputes refer to a number of disputes between Russian state-controlled gas supplier Gazprom and Ukrainian national oil and gas company Naftohaz Ukrainy over natural gas supplies, prices and debts. The disputes have involved politicians of both countries and have threatened natural gas supplies in numerous European countries that depend on Russian natural gas.
A serious dispute started in March 2005 over the natural gas and transit prices. This dispute culminated on 1 January 2006 with the cutting of gas supplies to Ukraine. The situation calmed on 4 January 2006 when supply was restored and a preliminary agreement between Russia and Ukraine was achieved.
Another gas dispute arose in October 2007 over gas debts and culminated in the gas supplies reduction in March 2008. During the last months of 2008 relations between Gazprom and Ukraine again became tense because of a dispute over the size of debts owed by Ukraine.
In January 2009, the dispute resulted in 18 European countries reporting major falls or cut-offs of their gas supplies from Russia transported through Ukraine.
Another factor which hindered Ukraine's progress in its early days of Capitalism was the lingering effects of the Chernobyl disaster, most noticeably the loss of agricultural trade as a result of radioactive contamination. 
Other serious problems which occurred at the beginning of Ukraine's independence were high unemployment and inflation rates. In 1991 the unemployment rate was 19%, but by 1997 it had shrunk to 10%, slightly higher than Canada's rate.
Due to the effects of the high debt, inflation, and unemployment, the Ukrainian government has been forced to beg for money. In 1992 Ukraine was given over $1.5 billion in aid, including $900,000 from the US to aid in the dismantling of Ukraine's nuclear arsenal and to solidify Ukrainian independence from Russia. 
As a result of all the problems facing Ukraine before it even had a chance to improve its circumstances, the move to a market economy has been slower than in other nations, such as Romania and China. As such, the economy has not yet fully converted, and the situation has not been able to improve. 
The Chernobyl nuclear disaster has also had a profound effect on the lives of millions of Ukrainians, and deadly effects on the Ukrainian economy. A total of 150,000 sq. km's of some of the best agricultural land in the world was poisoned by nuclear waste released during the Chernobyl disaster, and is still unusable today. Moreover, all agricultural products grown within 200 sq. km's of Chernobyl have been banned for human consumption. 
Due to the displacement of millions of people because of the accident, key cities such as Kiev and Kharkov have become overcrowded, which has caused high unemployment, homelessness, and created an increased need for the already underfunded social programs. 
Another problem related to the Chernobyl disaster is the medical dilemma brought forth due to the pollution. Since 1986, radiation related diseases have become 3.9 times more prevalent than before the accident, while the thyroid cancer rate amongst children has become 10 times higher than anywhere else on earth. In total, 1.5 million children have been diagnosed with thyroid problems, while the total number of people believed to have been infected by the pollution has risen to 2.5 million. This figure, however, is still believed to be climbing, as 2/3 of the Ukrainian population live along the Dnieper river, which is known to be contaminated with radio nuclides from the accident. 
All of this puts a huge strain on the medical system, which is already under funded. Due to the lack of money, many Ukrainians have been forced to try and find help outside of the country, and many have been forced to die cruel deaths, as they could not afford to pay the high hospital and medical fees. 
On top of lost trade income, the Ukrainian government has also been left with the burden of dealing with the clean up of the Chernobyl site. Ukraine needs to borrow $750 million US alone to completely seal generator 4 of the Chernobyl site. In fact, because of the high cost of importing energy from abroad, the Chernobyl site has been forced to remain open. In order to completely close the site, Ukraine needs to borrow an estimated $1.6 billion. To this point, only the G-7 has stepped forward to help by donating $300 million US. To make matters worse, the Ukrainian government cannot apply for IMF loans due to the high inflation within the country. This shortfall in money only adds to the sickness and pollution within the country, and only helps to hurt the already crippled economy, and weary citizens more. 
 
3. Actions taken by the Ukrainian government

However, the Ukrainian government has taken steps to alleviate the suffering within their country, and save the shaky economy. 
President Leonid Kuchma has been able to push many bills through parliament designed to help the ailing economy. 
Agricultural reforms, to this point, have been aimed at privatizing the former collective farms set up by the Soviets. By doing so, the government hopes to improve productivity. If productivity is improved, the government hopes that trade exports will improve as well. 
Other key reforms include the unification of the exchange rate, reform within the banking and tax systems, liberalization of prices, reduction of subsidies for money losing businesses and collective farms to encourage privatization, the loosening of trade restraints, and a new consciousness about paying off the national debt in order to stimulate the economy and encourage foreign investment. 
On top of all this, the government has created programs aimed at producing more energy inside Ukraine rather than importing it. Unfortunately, due to a lack of funds, and the reluctance of the IMF to give Ukraine more money, the projects cannot get off the ground. Finally, in order to help the suffering of the people, the government has deregulated the prices of everyday items such as food, transportation, and other important services to create competition within these sectors, and bring down already high prices. 
Despite all of the reforms, the economy is still being hampered by many internal factors within Ukraine. To this point, foreign investment in Ukrainian industries and enterprises has been tentative due to the constant threat of social upheaval. The slow move to a market economy has also held Ukraine back. A general lack of funds amongst the population to allow for privatization, a lack of authority in the central government to force provinces to implement its programs, and reluctance amongst the poor to welcome a market economy which has caused many to live in poverty has greatly affected the growth of the economy. 
Another factor holding back the economy is the instability within the country. 
Political instability and a divide in the parliament, which has made decision making slow, as well as the effects of the Crimean independence movement have hurt the foreign image of Ukraine, and made foreign investors look elsewhere. The constant threat of work stoppages by workers, specifically miners and doctors, has also hampered the reform efforts of the government. 
Finally, Ukraine's reliance on the IMF and foreign assistance, as well as a weak hryvnya, the currency of Ukraine, has made it an unattractive atmosphere to invest in. 
Though the economy has many factors working against it, there have also been some major breakthroughs recently, which show a strengthening of the economy.
The efforts put into improving foreign trade seem to be paying off as the 
Ukrainian trade turnover rose from $19.7 billion in 1994 to $23 billion in 1995, with a current trade surplus of $200 million per annum. 
Another sign of an improving Ukrainian economy is the growth of the private sector. Private sector production rose from just 40% of economic activities in 1995 to 60% currently. 
Ukraine has also achieved relative financial stability recently, based on the gradual reduction of the deficit. In 1997 the deficit amounted to 31.2% of the GNP, while it is currently 21%. As the deficit decreases, foreign investors will continue to see Ukraine as an increasingly safe place to invest in, and the economy will continue to grow. Unemployment figures have also improved since the early 90's. Even though the economy appears to be improving, one needs to only look at the Ukrainian people to see how desperate the situation truly is, despite the improving numbers.
 
Conclusions

The poor economic times, mixed with growing unemployment, the destruction of science, the lack of money for education, culture, and arts has created an atmosphere in which the average citizen feels they have little hope. People have lost hope that changes will ever occur. The costs of living here are enormous, as the average prices for consumer goods have risen by 83, 000 times in the past 5 years, while the price for communal services has risen by 170, 000 times.
Today, Ukraine is a far way from prosperity, but the promise of a great future is there. Geographically located between Europe and Russia, Ukraine has the potential to become a key trading hub between east and west, while the Black Sea ports Ukraine possesses show promise of becoming key naval links. Ukraine also possesses huge quantities of natural resources, including the fertile Steppes. Mixed with a trained and well educated working population all the keys to success are there. With the economy growing at a steady rate, Ukraine seems poised to move ahead and become a major world economic power. However, if it is to do so, it must begin to alleviate the suffering of its people, and implement programs which help everyone, not just the wealthy.
 
Bibliography

Behind the Russia-Ukraine Gas Conflict By Miriam Elder, http://www.businessweek.com/globalbiz/content/jan2009/gb2009013_045451.htm?chan=globalbiz_europe+index+page_energy+%2Bamp%3B+environment
Economy of Ukraine, http://en.wikipedia.org/wiki/Economy_of_Ukraine
FACTBOX - 18 countries affected by Russia-Ukraine gas row, http://www.reuters.com/article/topNews/idUKTRE5062Q520090107
Macroeconomic Indicators of Ukraine, http://www.bank.gov.ua/Engl/Macro/#2001-2008
Russia–Ukraine gas disputes, http://en.wikipedia.org/wiki/Russia-Ukraine_gas_dispute#cite_note-reutersfactbox712009-1
What Ukraine's WTO membership tells us about the global economy. Peter Mandelson in Delo, 18 February 2008



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