Ukraine: Unrealized Potential in the Soviet Union’s Breadbasket

Back to the European side of things with this student’s post on Ukraine’s economic challenges.

Ukraine has made quite a bit of progress since it left the Soviet Union in 1991, becoming an emerging market economy that has integrated into the global trade network. The World Bank considers Ukraine a “lower middle income” country,[1] with an estimated 2012 GDP per capita is $7,600, putting Ukraine squarely in the middle of the world index.[2] A legacy of the Soviet Union, Ukraine has many heavy industries, including arms manufacturing, steel production, electronics, and mining of iron and other minerals. Its rich black soil was the breadbasket of the Soviet Union. Ukraine’s growth strategy has been export-oriented, with exports of steel and other metals, as well as agricultural products such as sunflower seed oil, being the primary drivers. This strategy was quite successful during the 2000s, but it also meant dramatic drops in growth during the global recession as steel prices dropped.[3] However, Ukraine has recovered fairly well from the global financial crisis, with its economy reaching pre-2008 levels in the first quarter of 2010.[4]

Another legacy of the Soviet era is that most of Ukraine’s major industries are economically underdeveloped, suffering from underinvestment and inefficiency. Most farmland is state-owned, as are many important sectors of the arms, electronics, and metals industries. While the potential for these industries is huge, it is unrealized because most of the state-owned firms are uncompetitive at global prices. Furthermore, private investors face a slew of problems, such as tight controls over capital and finance, pervasive corruption, and sketchy contract enforcement.[5] The climate for investment is uncertain at best. This makes it difficult to draw capital to the industries that have been privatized. Small businesses also operate under a heavy regulatory burden. The Heritage Foundation estimates that completing licensing processes for a start-up costs 10 times the average annual income of a Ukrainian.[6] Streamlining this process and emphasizing a uniform regulatory environment could bring major relief to Ukraine’s economy.

However, the government should be careful not to modernize its economy in a way that neglects the poorest segments of the population. Nearly a quarter of the country’s population lives below the poverty line, with poverty rates almost twice as high in rural areas. The Human Development Index for Ukraine lags behind other Eastern European countries.[7] Reductions in wages and benefits for workers, which is what the Heritage Foundation means when it says the labor market requires “flexibility”, seems a poor way to remedy that situation. Simply selling all of Ukraine’s state-controlled industries at fire-sale prices to foreign investment banks and Russian oligarchs will not help the country develop in a balanced way. Instead, Ukraine should pursue careful privatization that both allows and protects foreign investment, but retains strong protections for workers and encourages domestic ownership of capital. GDP growth is not the only way to measure the health of a country.

[1] “Ease of Doing Business in Ukraine”, International Finance Corporation & the World Bank, 2012. Accessed Feb 21, 2013,

[2] CIA World Factbook: Ukraine. Accessed Feb 20, 2013,

[3] CIA World Factbook: Ukraine

[4] “Ukraine – Macroeconomic Situation- April 2010”, UNIAN Information Agency, May 19, 2010. Accessed Feb 20, 2013,

[5] “Ukraine”, 2013 Index of Economic Freedom, the Heritage Foundation. Accessed Feb 20, 2013,

[6] Ibid.

[7] United Nations Development Program: Ukraine. Accessed Feb 20, 2013,


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