Ukrainian infighting and its sagging economy

A big news item recently has been the splitting of Ukranians two leaders of the Orange Revolution. Last week President Victor Yushchenko sacked his seemingly Dianne Feinstein like Prime Minister Yulia Timoshenko. Then Yushchenko's new PM, Yuri Yekhanurov, was rejected by Parliament, mainly because of his connections to corruption allegations.

This is all, of course, terrible news to hear, especially after it was the feel good story of last winter. It seems though, that at the heart of it, the problems are not complex. The diagnosis is that the country has not properly privatized its massive state infrastructure. One problem has been allegations of shady deals in the selling of the state's holdings. The other has been that Ms. Timoshenko's populist tendencies--although perfect for a populist revolution--have been ultimately very damaging to the once "hot" Ukranian economy. Anders Aslund (via Marginal Revolution) picks it up here:

For the past eight months...Ukraine's economic policy has been nothing short of disastrous. Economic growth has plummeted from an annual 12 per cent last year to 2.8 per cent so far this year, driven by a fall in ­investment.

The blame for this startling deterioration must lie with the government's economic policies. By agitating for widespread nationalisation and renewed sales of privatised companies, the government undermined property rights. In addition, it raised the tax burden sharply to finance huge increases in welfare spending and public wages. Very publicly, Ms Tymoshenko interfered in pricing and property disputes, criticising individual businessmen. Chaos and uncertainty prevailed. This populist policy had little in common with the electoral promises of Viktor Yushchenko, the president, about liberal market reforms.

But not all hope is lost. Aslund continues:

...there are hopes the new government will be quite productive, although it will serve for only half a year until parliamentary elections next March. Its first task will be to stop the destabilising re-privatisation campaign, which is likely to lead to only one or two re-privatisations, and declare a big amnesty for other privatisations. A long-promised major deregulation, eliminating thousands of harmful legal acts, will finally be promulgated. The last laws needed for Ukraine's accession to the World Trade Organisation can now be swiftly adopted. The budget for next year, which contains some tax cuts, needs to be enacted.

The crucial political battle, however, is the elections next March. The confirmation vote for Mr Yekhanurov suggests a new dividing line in Ukrainian politics. Most of the rightwing and centrist party factions supported Mr Yekhanurov, while Ms Tymoshenko's bloc, the communists, and two oligarchic parties opposed him.

From now on, the big antagonists in Ukrainian politics are likely to be Mr Yushchenko and Ms Tymoshenko. Their individual popularity remains roughly equal. A consolidation around these two figures is possible, especially as the next elections will be proportional. Ideally, a US-type Republican party could be formed around Mr Yushchenko and a more leftwing, populist Democratic party around Ms Tymoshenko, but it is also possible that the old fragmentation will persist.

Each side has "orange revolutionaries" as well as oligarchs from the Kuchma period. The big question is whether Ms Tymoshenko's revolutionary fire has burnt out or whether Mr Yushchenko's bold attempt at post-revolutionary stabilisation is premature.

It seems possible Yushchenko's move is on par with that of Japanese President Junichiro Koizumi, whose bold call for election (that ultimately ousted many renagade MPs of his own party) will allow him to privatize the state's massive postal service (which does not just deliver mail, but also is a bank that inefficiently houses three trillion dollars in savings).

Of course, it is also possible that Yushchenko's ambitious agenda will be swallowed by infighting and rent-seeking. It seems possible that entry into the WTO could jump start the sagging economy and reaffirm people's wobbly faith in Yushchenko. I can only hope.

-Mr. Alec