By (Prof.Dr.Dr.hon.c.mult.) Bohdan Hawrylyshyn
Founder and Chairman of the Board,
International Management Institute (IMI-Kyiv)
Published by The Action Ukraine Report (AUR) No. 515
Washington, D.C., Tuesday, July 5, 2005

A number of facts provide the basis for making a good prognosis for Ukraine's economic development for the next 10 years or so, i.e. recent growth of GDP and DFI, current economic and administrative situation, historic patterns of economic growth, Ukraine's economic potential for growth, and absorptive capacity of Ukraine for DFI.

Ukraine has been in the economic take-off stage since late 1999, early 2000. There were several contributing reasons: land reform, reforms in the energy sector, carried out  by Yulia Tymoshenko, at that time Deputy Prime Minster and now Prime Minister, which imposed the shift from barter deals between producers and distributors of energy to monetary settlements, which brought new revenue to the state budget.

This allowed the Cabinet of Ministers under the then Prime Minister, Victor Yushchenko, to pay most of the salary and pension arrears, which, in turn, increased the purchasing  power of the population, thus creating a greater consumer demand.

To satisfy the demand, foreign companies, operating in Ukraine, and existing Ukrainian companies increased their capacities, along with new, particularly small and mid-size companies, which increased the supply side. This led to quick growth of traditional sectors, like metallurgy, chemical machine-building, and particularly food-processing.

The above resulted in the growth of GDP per capita during the last 4 years of 9 % per year on average. This also increased the annual DFIs, but not to possible and desirable level because there was some political instability, changing legislation, pervasive corruption, arbitrary actions, many bureaucratic barriers and weak judicial system.

Thanks to the Orange Revolution, resulting in the election of the New President and Cabinet of Ministers, the image of Ukraine changed rather dramatically. Also, there is a firm commitment of new powers to work towards a membership in the European Union, integration into the Trans-Atlantic structures and development of full-fledged  democracy and a real market economy. The government is under pressure to bring about a lot of changes.

Even though the demands of the Orange Revolution were only "Liberty and Freedom", rather than "Bigger salaries, more jobs", a lot of promises have been made by the President and his team during the Revolution and they have to satisfy those promises. This, in addition to the increases in pensions, salaries and other commitments, made by the previous government, put the current government under pressure to act over a very broad front and very quickly.

Given the fact that the governing team are in the great majority new people, yet much of  bureaucracy remains the same, it will take some time and possibly until after the next parliamentary elections in March 2006 for the government, whose composition is likely to change, to become fully effective.

Given the fact that elections in question will be based on party lists, rather than be a mixture of party lists and majoritarian system, there will be fewer, stronger parties represented in the parliament, hence likely stabilization and improvement of legislative process and cooperation between the Cabinet of Ministers and the Parliament.

A very important basis for predicting fairly high rates of growth of Ukraine's economy over the next decade or so, is the pattern on growth of different economies starting in the XIX century and continuing through the XXth. This pattern was as follows: once a country  fulfilled the so called "pre-conditions to take-off", it would start growing between 7 and 10 % per year on the average for up to 30 years.

This has been the case of the United States in the XIXth century, followed by imperial Russia after 1861 (abolition of serfdom and opening up to foreign investments), then after the World War II  Japan from 1952, later also by Italian and more recent East Asian "economic miracles". Now China is the most outstanding example of such economic growth pattern.

The ability of a country to follow such growth pattern depends on the will of the people to work hard, appropriate knowledge in all kinds and levels of jobs to work well and sufficient level of domestic and foreign investments to give people necessary instruments (a horse power behind every elbow and now a computer behind every brain) to work effectively. These 3 preconditions are fulfilled when a country is governed with wisdom.

As far as Ukraine is concerned, it has a broad range of natural resources (though short on oil and gas), very fertile soil, reasonable physical infrastructure, highly educated population, particularly in natural sciences, engineering, but now also in management (I can speak about his last point with real conviction).

The International Management Institute-Kyiv, which I founded in 1989, has alone gradated over 1300 people from post-graduate, post-experience MBA programs and a couple of thousands of people from shorter  seminars, and in-company programs.

What is still needed is the improvement and stabilization of legislation, reduction of bureaucratic hurdles, corruption, and strengthening of the judicial systems. The current government is very firmly committed to bring about the needed changes. After a short observation period,  the DFIs will, therefore, increase sharply.

Even the shortage of oil and gas need not continue to be a constraint on growth for a long period. First, Ukraine still have some deposits of oil and gas, and with better exploration and extraction technologies, the production of both can increase. Several years ago, for instance, British Petroleum Co had estimated that production of natural gas in Ukraine could be increased by 20 billion m3 per year.

Also, as part of its heritage of the Soviet Union, Ukraine has an economic system and structure that is too energy intensive. It uses 3 times as many calories per unit of GDP than Germany. With likely changing economic structure, energy saving and increasing efficiency in energy use, Ukraine will be much less dependent on the import of oil and gas from Russia and is already building a system on alternative sources of energy supply.

Given all above, the absorptive capacity of Ukraine for the DFIs is bound to increase in the coming years. This also because of changing economic structure, of improvements of physical infrastructure, the already existing natural resource base, quality of human resources, the expanding internal market and export capacity.

One can ascertain that within 5 years Ukraine should be able to attract and absorb the DFIs of around 5 billion USD per year (i.e. around of 100 USD per capita of Ukraine's population) and sustain that rate for the following 5 years.

The cumulative investments (1'000 USD) by that time will be approaching the current per capita cumulative investments in some of the new members of the EU. The economic boom will be sustained also due to the likely significant increase of investments from domestic sources.

Barring some cataclysmic effects more of external or world economic or geopolitical character rather than of internal nature, and given all the above factors and the fact Ukraine will definitely not go back to the policies and practices of the previous regime, the economic prospects of Ukraine for the next 10 years are good.