Back on the 14th of last month, I linked to a post at the Wall Street Journal‘s Emerging Europe blog about the Ukrainian economy. Author Alexander Kolyandr argued that Ukraine’s economic stagnation has much to do with its unsettled politics, and that–in turn–Ukraine’s political issues aggravated its economic issues. (Volatile prices for raw material exports and the old state of Ukrainian industrial plant didn’t help, either.)
Ukraine’s gross domestic product in constant 2005 U.S. dollars was at $97 billion in 2013, compared to $113 billion in 1992, according to U.S. statistics. The performance looks even less impressive compared to that of the neighboring Russia, whose GDP expanded to $1 trillion in 2013 from $684 billion in the first post-Soviet year.
Using the more conventional measure of GDP adjusted for purchasing-power parity, Ukraine’s performance seems better, as its economy expanded to $341 billion from $267 billion, or about 28% in 20 years. Because Ukraine’s population shrank over the period, GDP per capita expanded by 46% to $7,532 from $5,163.
But those numbers don’t look so impressive next to Russia’s, where GDP grew by 125% for the same period, while the GDP per capita was up by 137% to $18,670, more than twice that in Ukraine.
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A string of Ukrainian governments lacked the political will, the clear vision and experienced economists to launch economic reforms and privatization similar to those in Russia or Central Europe.
At the beginning of its independent existence Ukraine’s leadership saw excessive dependence on Russia and nation-building as a primary problem, while the inheritance of the communist system was not given sufficient attention. Unlike in Russia, not to mention the Baltic states, much of the old Soviet establishment persisted in Ukraine. “The old communist elite simply changed their party cards for the national insignia,” as economist Anders Aslund put it.
Ukraine recovered somewhat in the mid-2000s thanks to cheaper foreign loans, abundance of capital and high prices for metals. But all that halted in the 2008 financial crisis, and the country’s economy is yet to reach the pre-crisis level.
Writing for Bloomberg BusinessWeek, Charles Kenny argues (“Why Ukraine Really Would Be Better Off In Europe” that Ukraine would be better off aligning itself with the European Union than with the putative Eurasian Union.
In 1989, average income per capita in Ukraine was $8,629. By 1998, that had collapsed to $3,430. In 2012, GDP per capita had recovered somewhat—but at $6,394, it was still 25 percent below its level of nearly a quarter-century earlier. That puts Ukraine in the middle of the pack of former Soviet states, if you exclude the three Baltic economies of Latvia, Lithuania, and Estonia, which are already members of the European Union. But compare Ukraine with four of its former Communist neighbors to the west: Poland, Slovakia, Hungary and Romania. The average GDP per person in those nations is around $17,000—and they in turn are poorer than West European countries. If Ukraine builds trade and financial ties with Russia and central Asia, it will be a midranking country in a middle-income club. If it builds these ties with the EU, it will be a relatively poor country in a rich club.
To be sure, being poor relative to everyone else isn’t a great recipe for rapid growth, despite the apparent advantages of being able to borrow technologies, techniques, ideas, and money from richer countries. Indeed, the last 200 years have been a period of incredible global income divergence—poor countries have grown more slowly than rich countries. In 1870 the world’s richest country was about nine times richer than the world’s poorest country. By 1990, that gap had grown to a 145-fold difference. The past 10 years have seen poor countries growing faster than rich ones in average–income convergence—but they are the historical exception.
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Nonetheless, regions within countries often do converge—in the U.S., the gap between rich and poor states has traditionally fallen by about 2 percent a year (although that process has slowed in the past couple of decades). Within regional groupings of countries, there is stronger evidence that poorer countries benefit. From 1937 to 1988, poorer parts of Eastern Europe (Yugoslavia, Romania, Bulgaria) grew faster (pdf) than richer countries (Poland, Czechoslovakia, and Hungary). The story is similar in Latin America (Brazil, Mexico, and Columbia grow faster than Peru, Venezuela, Chile, and Argentina). The Economic Community of West African States is following a similar pattern. Perhaps of most relevance to politicians and protestors in Ukraine, there’s some evidence of convergence within the European Union—although perhaps unsurprisingly, newer members are converging toward a common income with each other faster than they are converging to the EU average.
There’s nothing automatic about convergence within regions. Take Greece, which had an average income worth 82 percent of France’s income in 1981 when it joined the European Community, and had income of only 74 percent of France’s 30 years later. But there’s still an opportunity for Ukraine in Europe—take Portugal, where incomes have climbed from 59 percent of France’s average when it joined the European Community in 1986 to 71 percent 26 years later. The potential for catchup is even greater for the former Soviet Republic, since its current income per capita is only one-fifth that of France.
When it comes to convergence within economic communities, the evidence suggests that two lessons of real estate apply: First, you’d rather be the last house on the right side of the tracks than the first house on the other side. Second, if you want your investment to appreciate, it’s best to be the cheapest house in an expensive community than the luxury condo in a lousy neighborhood.