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| World Marketplace |
After the Revolution
Anders Åslund
01/01/2006
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The Orange Revolution may have
been a national catharsis and a popular uprising for freedom and democracy, but
it was also a revolt of the millionaires against the billionaires. Central to
the revolution were several multimillionaires who hoped to seize the fortunes of
the defeated oligarchs. One claimed he put up $150 million for Yushchenko’s
election. Although Yushchenko had promised to draw a line between politics and
business, he had little choice but to appoint four of these free-spending
multimillionaires to top positions in his administration.
But Ukraine’s
economic policy under the post-revolution administration has proved nothing
short of disastrous. Economic growth plummeted from a 12 percent annual rate in
2004 to 2.8 percent during the first eight months of 2005, driven by a dip in
investment and construction. In August, GDP even contracted by 1.6 percent
compared with August 2004.
| Regardless of the outcome of the next elections, many reasons to
be optimistic about Ukraine’s future remain. |
Throughout the post-Soviet period, the Ukrainian
government has welcomed foreign investment in words, but in reality, foreign
investment has been hampered by red tape and opaque regulations. The Tymoshenko
government said it wanted to boost foreign direct investment, but its
preoccupation with reprivatization proved more pressing. Prime Minister
Yekhanurov has emphasized his interest in foreign investment all the more, and
investors sense that Ukraine is going from terrible to bad—offering prime
opportunities for those less averse to risk. In fact, foreign investors who have
persevered, notably in food processing (brewing, tobacco, chocolate and
vegetables), have done extremely well because costs are low and competition is
limited. The only foreign investors who have succeeded in heavy industry,
however, are Russians (although American power company AES owns two regional
electricity distributors). In October, Lakshmi Mittal, the world’s third-richest
individual, purchased 93 percent of Ukraine’s largest steel mill for $4.8
billion, the country’s largest privitazation deal to date.
While the global
decrease in steel prices has hurt Ukraine’s economy, the preponderant blame for
its startling deterioration rests with the government’s economic policies.
Tymoshenko agitated for the reprivatization of some 3,000 companies, which she
planned to nationalize and subsequently sell. The result, however, was that the
government undermined all property rights. Its enemies naturally feared
nationalization; they halted further investment and even attempted to extract
their capital from the country. Their business opponents hoarded cash to be able
to purchase the nationalized companies, further dampening investment.
The new
government also raised the tax burden sharply, from 36 percent of GDP to 42
percent by abolishing loopholes such as free economic zones. These revenues were
needed to finance huge increases in welfare spending and public wages. The old
regime had doubled pensions in the midst of the election campaign, and the new
regime boosted government salaries by 57 percent.
Tymoshenko further damaged
the economy when she very publicly interfered in pricing, trading and property
disputes. She held frequent press conferences, lambasting individual businessmen
by name. She tried to regulate gasoline, meat and grain prices like an old
Soviet manager. Chaos and uncertainty ensued. This populist policy had little in
common with Yushchenko’s electoral promises of liberal market reforms. But, in
hindsight, these policies seem a natural outcome of revolutionary euphoria and
hubris.
Political Upheaval
In early September, however, all hell broke loose.
Yushchenko’s chief of staff resigned in protest against the influence of the
businessmen surrounding Yushchenko. Meanwhile, Tymoshenko ordered the police to
seize a large factory from the oligarch Pinchuk to the apparent advantage of the
oligarchic Privat Group, although her decision lacked a legal basis. Pinchuk
successfully urged his workers to defend the factory, leading to a tense
stalemate. After three days of crisis meetings, Yushchenko made the Solomonic
decision to sack everybody, both Tymoshenko and the big businessmen. The general
business community and economists alike were relieved to see the revolutionary
firebrands depart, and the broader public appreciated the exit of the big
businessmen.
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