Economics of Disintegration in Ukraine

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Open Democracy

Economics of Disintegration in Ukraine

‘Shock therapy’ was imposed on the post-Soviet world by the West, with catastrophic results. Now we are planning on repeating that experiment in Ukraine.

The Donbass region in Ukraine's East is the industrial heartland of the country. Photo cc: Yakudza

In the future, people may look back on the political disintegration, social fragmentation and economic collapse of the Soviet Union – the Great Disintegration – as a human disaster comparable to the Black Death of the 14th century. With the Black Death, people knew neither the cause nor the cure.  During the Great Disintegration, the cause was obvious and the cure known.  A regime collapsed due to its own dead weight. The economic disaster that followed, however, resulted from dysfunctional economic policies fostered by the Western Powers.

The Donbass region in Ukraine's East is the industrial heartland of the country. Photo cc: YakudzaThe massive scale of the human disaster in the post-Soviet transitional countries appears most clearly in statistics on life expectancy (see A. Cornia, The Morality Crisis in Transitional Countries).  In the case I know best, the ex-Soviet Republic of Moldova, from 1990 to 1995 life expectancy at birth fell by almost three years, to below 66. A peacetime fall in how long people live is almost without precedent. The only example in recent times was the AIDS epidemic in some sub-Saharan countries.  

The major cause of this decline in life expectancy, in the transitional countries was the so-called shock therapy that dismantled the institutions of the planned economy, and substituted nothing in their place. Millions of people across the former Soviet Union lost their livelihoods, budget cuts destroyed health services, and poverty drove people to life-shortening drunkenness and drugs. The explicit purpose in the draconian 'adjustment' policies designed by Western governments was to ensure that the Soviet Union could never be reconstructed. Vladimir Putin is only too aware of this purpose, and hopes to thwart it.

Elections do not a democracy make.

In the 1990s, politicians in the United States and Western Europe hailed the collapse of the Soviet Union as liberation. But elections do not a democracy make, and 25 years later, at least eleven of the 15 countries carved out of the USSR qualify as authoritarian regimes, including Russia itself.  The governments in three Baltic countries have shown themselves to be serious violators of civil rights, as well as tolerating overtly fascist groups. This leaves only tiny Moldova as a credible candidate for the club of democracies.

Each former Soviet republic had its transition tragedy. Measured by the fall in per capita income, Ukraine's was the worst except for Georgia that descended into separatist civil conflict after 1990.  Income per person in Ukraine fell almost 60% from 1990 to 1997 and did not begin recovery until 2000. At the end of 2013 it remained over 20% below 1990 (see chart below).  

Per Capita Income in Ukraine, 1990-2013

In this context we can understand the tensions and conflicts within Ukraine. A part of the wealthy elite views the European Union as a bloc offering a bright economic future. This group carries the largely Ukrainian-speaking west of the country with it, making capital out of anti-Russian sentiment, generations in the making.  In the east, the predominantly Russian speakers look to Russia where, in 2013, per capita income was 20% above 1990, compared to the 20% below in Ukraine. The income fall in the east of the country has been even greater than the national average due to the concentration of heavy industry formerly linked to the Soviet Union through the erstwhile trading bloc COMECON.

Nevertheless, as severe as the economic suffering in Ukraine was in the 1990s under shock therapy, the United States and its European allies plan to repeat it, via an International Monetary Fund programme. The Bloomberg View (30 March 2014) reports that this shock therapy déjà vu promises to approach the severity of its predecessors during the 1990s:

‘…Russia…has been feeding mainly Russian-speaking eastern Ukraine a narrative about how closer integration with the European Union will close their mines and factories, eliminate their jobs, raise prices, and reduce their pensions.

‘Yet to secure the IMF deal, interim Prime Minister Arseniy Yatsenyuk had to tell Ukrainians that just this scenario will in part be played out. He warned that inflation could rise as high as 14% this year, as the economy contracts by 3%.

‘In such a situation, the IMF's standard "shock therapy" isn’t an option. The IMF’s loan conditions – cutting the subsidies provided to heat homes, for example – are essential, but the impact on ordinary citizens needs to be cushioned far better than the government can afford.’

As in the 1990s, the governments of the United States and the European Union offer 99% of Ukrainians a grim future.

As in the 1990s, the governments of the United States and the European Union offer 99% of Ukrainians a grim future. The population is urged to reject Putin's aggression and authoritarian proclivities, and accept instead a programme that even a voice of Wall Street considers ‘isn't an option.’ 

A part of Ukraine's elite, largely located in the West, sees the EU as offering a bright economic future. Photo cc: David HoltThe government implementing Shock Therapy Version II reached power in Ukraine by supporting the overthrow of a constitutionally elected president. There is little doubt that corruption thrived under the government of deposed President Viktor Yanukovych. Equally beyond doubt is the corrupt track record of those who aspire to replace him.

The IMF programme may be the economic disaster that provokes a greater disaster, the break-up of Ukraine.

An extra-legal regime in power, oligarchs endorsing a new draconian economic programme, per capita income in decline and certain to decline further under that programme – it comes as no surprise that Ukrainians in the east of the country look longingly if haplessly to Russia.  More surprising, is that this second programme of shock therapy finds support in Western Ukraine, which brings to mind the comment attributed to Albert Einstein, that ‘insanity [is] doing the same thing over and over again and expecting different results.’ 

For the US and EU endorsers of shock therapy, it is madness with a purpose – asserting political influence in Ukraine. The IMF programme may be the economic disaster that provokes a greater disaster, the break-up of Ukraine. US and EU policymakers and the Ukrainian oligarchs may well consider this outcome the fallback solution to their geopolitical and economic goals, when, in fact, it is more likely to be a human disaster.

John Weeks

John Weeks is Professor Emeritus, School of Oriental & African Studies, University of London, and author of Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy, Anthem Press, published earlier this year.

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