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Russia and the Ukraine

June 21, 1997

The transitions of the republics of the former Soviet Union (FSU) share common features: The Newly Independent States of the FSU all experienced dramatic drops in real GDP, rapid inflation, sharp increases in inequality and rising poverty. With the exception of the three Baltic states, these transitions have not been especially successful. Many have yet (as of mid-1997) to resume growth; none has been able to record rapid growth. Although many have overcome the near hyperinflation of the early transition years, inflation rates remain in double digit figures for most of these countries.

This paper addresses the relationship between macroeconomic policy, structural factors, and poverty in the two most populous former Soviet republics: The Russian Federation (148 million) and the Ukraine (51 million). Their transition processes have differed in a number of respects. In Russia, privatization was carried out quickly at a relatively early stage of transition (Desai, Oglobin). In the Ukraine, privatization is just beginning. Russia began its quest for macroeconomic stability earlier than the Ukraine, and, although Russia’s macroeconomic stabilization policies were not exemplary, they nevertheless appear superior to those of the Ukraine. While Russia’s transition can be characterized by “stop-and-go” policies of shock therapy in one period followed by gradualism in another the Ukraine’s policies, at least for the first five years of transition , serve as an example of “gradualism.”

Russia and Ukraine differ in their resource endowments. Russia has the world’s richest deposits of hydrocarbons and is a major supplier of raw materials. Ukraine is known for its vastly underutilized agricultural resources. We must consider the effects of “inevitable” structural forces associated with the transition on poverty and income distribution. Poverty in transition economies may indeed be independent of macroeconomic policies, induced instead by the change from planned to market allocation. Any structural factor that affects real economic growth, real wages, or the distribution of expenditures among households will affect the incidence of poverty in a country. The transition from planned to market economies may alter relative wages to increase earnings inequality, for example. Near hyperinflation may alter the distribution of real expenditures insofar as inflation creates winners and losers. Russia and Ukraine are contrasts in data availability. We have rich independent panel data on Russian households to complement and check official statistics . In the case of the Ukraine, we have the official data supplemented by one independent survey for 1995. Any conclusions concerning Russia, therefore, are more reliable than those on the Ukraine. Independent tests of Russian official data show the dangers of reliance on official data, primarily because of their employment-based family budget surveys.

by Paul Gregory

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