The Level of Success in Transition between Russia and Ukraine - Assignment Example

As 1991 set in the federation of Russia had about 23,776 large and medium-sized industrial firms as well as approximately 170,000 small enterprises which were mostly retail shops. In 1999, this number had grown vastly since the number of registered enterprises stood at around 2.9 million. In addition to the registered enterprises there were a good number of unregistered ones operating in the former Soviet Union. Despite the high level of rise in the enterprises, number, it has not triggered economic output rise as well. Economic output as per 1999 had decreased in a considerable rate in the former Soviet Union. For example, in the 1998 estimates of real GDP reflected just 60% of the GDP level of 1989. This transformation has also led to the industrial production levels. For instance, production by the Russian industries had declined by half in 1996 compared to 1991. Industrial production in this economy remained a key factor of the economy, though. A major contribution to the deep fall in the output of the economy of Russia was production network’s disintegration. The fall in the relative essentiality of the industry in the economy of the former Soviet Union was due to the over-reliance on industrial production while at the same time neglecting the services’ development significance. The enterprise boom can thus be explained by this neglect of the services sector as well as the retail trade. The natural impact of the state monopoly abolition on the activities of enterprises was the declining role of state in the economic issues. The shift from state governed enterprises to private enterprises was not only caused by the establishment of new private enterprises but also by the process of the state enterprises privatisation. (Liuhto, 1999) Privatisation of the assets of the economy of Russia especially aided in the accumulation of capital by the new bourgeoisie in the nation. According to the Marxists.org website bourgeoisie refers to a class of individuals in a society of bourgeoisie who happen to own the social production means in form of a private property. That is, as capital. (Marxist, 2009) When one looks at the Russian bourgeoisie’s nascent structure in entirety, one can point out that this class’ wealth is mostly concentrated in the resource and financial sectors as opposed to the industrial sector. Thus, this class is part of productive investment. A major growth area in the class of bourgeoisie is the capital flight. As the whole of the economy of Russia suffers an economic downturn, the class of bourgeoisie has amassed extraordinary wealth amounts. A weak domestic bourgeoisie is exhibited in Russia with high levels of political and economic dependence on the internal domestic state. Externally, bourgeoisie depend upon the capitalist metro poles. (Gill and Markwick, 2000 p214, 215) On the other hand, Ukraine, which was part of the former Soviet Union and which also, started a market economy and a democratic regime from a similar point with Russia and Belarus had a different path to follow. All the three states, however, had to encounter numerous similar predicaments on their way to transforming to market economies. The economies differ with regards to the size of economic shocks from external sources and the direction of political and economic transformation. Russia has been able to reap large gains when it comes to the stoppage of delivery of energy factors of production to the neighbours at lower than global prices. It has also been successful in curbing implicit and explicit fiscal transfers. Ukraine, however, has had to cope with terms of trade that are deteriorating with regards to Russia. Predicaments were also evident when it came to the demand of Ukraine’s manufactured commodities which were usually focused on the market of Russia and Military functions. This is as per 1995. (Dabrowski and Antczak, 1995) In Russia, the opinion of experts is that there has been development of state capitalism in the last few years. This started with the gas and oil industries. The reign of Putin has been labeled the era of nationalisation. The regime of Putin started with deals of privatisation. Nationalisation cannot be achieved without the most important assets’ privatisation due to the fact that it is the only way to enhance property against risks of political changes. One can say that the two stages of Putin’s plan had to overlap. This is since; nationalisation is in progress while privatisation is at its peak. (reuters.com, 2009) Ukraine, on the other hand had a strong achievement in terms of economic recovery from the year 2000-2004. However, this stalled in year 2005 when GDP growth delined to about 2.4% in comparison to 2004’s 12%. On taking office, the Prime Minister Yekhanurov made it public that there would be a reconsideration of the already settled deals of privatisation. The deals would be limited to few numbers of cases. However, the debate of reprivatisation is one of the major campaign factors in parliamentary elections. The government may remove the uncertainity by stopping all the deals of privatisation and when it is of necessity their legitimacy would be argued in courts. Opposition emanating from elsewhere and parliament to the further state ownership reductions leads to grave concerns regarding the future of privatisation as well as the private property rights’ security. (Schwoediauer, et al, 2006) By year 2002 there were signs of positive things to come in terms of foreign direct investment. This is due to the vastness of the size of this country, technology, exploitable skilled labour force, natural factors of production and around 150 million consumers. (Ogutcu, 2002) Under the regime of Putin, FDI has risen to the second highest rates in the history of Russia, in 2002. This, however, slowed down in 2003. Putin brought a considerable stability politically and this has increased the foreign investors’ interest in the Economy of Russia. (econ.ohio-state.edu, 2006) Ukraine, on the other hand, has its FDI concentrated on metal and food industries in the tradable sector and retail and wholesale trade and banking among the sectors of non-tradable. The contribution of FDI to gross capital formation was represented by just 5% of total financing investment in 2005. The potential of this nation of Ukraine to get more FDI is less exploited since it has high human capital as well as comparative advantages. This failure to attract a big FDI shows an unhealthy climate of doing business and very big barriers of regulation. (OECD, 2007 pp 123, 124) In 1998, Russia had one of its hardest struggles in trying to control its currency. As a result, there were public pleas in the Russian and Western media make a one-time devaluation of currency of about 15-20% and this is to be followed b y an establishment of a board of currency. (Lewis, 2007 p358) The economy of Russia mostly uses dollars subsequent to the 1998 currency crisis. This is due to the high levels of inflation and lack of applicable financial instruments. The total cash in the economy of Russia, as per 2009, had around 80% dollars. (Fridman and Verbetsky, 2009) The domestic currency markets of Ukraine were experiencing a very huge deficit of foreign currency. This is the worst since the financial crisis in the region towards the late 1990s. One of the major challenges facing the Ukrainian authorities is the high level of devaluation of hryvnia. The currency declined to an all-time low especially against the major foreign currencies. Due to the extent of the currency devaluation, the Central Bank’s policies have been largely questioned. The rising pressures of devaluation have made the Ukrainian National Bank to go back to its active role in the wholesale market of currencies. (Forbes.com, 2008) Year 2003 saw the dawn of a new law, ‘on the General Principles of Organizing Local-self Government in the Russian Federation. This was ratified by the parliament of Russia and this led to the number of municipalities doubling by the end of year 2005. The first round of the main elections in Russia happened in 2004- 2005 where 198,815 deputies as well as 13,655 local administrations’ heads were duly elected. This is somehow surprising, given the huge participants levels of citizens participating in the politics of grass-roots. (Ross, 2008 p1) Crucial decisions need to be made by the ruling elite in Ukraine as regards the shape political system of the country. The choice lies in the two-fold options of a strong presidential system and a semi-presidential system, in which parties and the parliament are strong. Evading the party process of institutionalizations permits the short-run attitude to the political power to dominate. This is at the expense of making stronger the democratic institutions. Lack of political parties that are institutionalised and the single-minded logic of control of political leaders over the institutions of the state could thus arise. This is the similar path taken by Kuchma in 1994. The process of democratisation of the nation of Ukraine is therefore at stake. (Emerson, et al 2006 p160) A major question arises regarding Russia’s economic growth. This is especially due to the fact that Russia is a resource based type of economy. It is quite unclear whether the rapid expansion pace will be sustainable in future. In spite of the belief in the 1950s as well as 1960s when economies were believed to have a huge growth potential if they had vast natural factors of production endowment. However, the last twenty years have brought with them the argument that natural resources are actually an obstacle to achieving economic growth. (Ahrend, 2008) According to OECD- Organisation for Economic Co-operation and Development, it is a hard task to reduce the level of Russia’s dependence upon natural resources. These are especially natural resource exports. The hope that remains is that the nation will increase its investment growth to develop a comparative advantage in other areas besides exports of minerals. This depends upon the speed of overcoming the present handicaps through the process of modernising production and process of production, apt marketing approaches and an ample experience when it comes to international markets’ arena. (OECD, 2004 p130) After considering every of the discussed factors that serve in determining the level of success in transition, therefore, I would consider Russia to be more successful than Ukraine. This is after tackling, privatisation and renationalisation, FDI, currency stability, use of money substitutes, democratisation and in the case of Russia reliance of natural resources. These countries have had almost similar predicaments while achieving this, though. Reference list: Ahrend, Rudiger. (2008). Russia: Can Russia Sustain Strong Growth As A Resource Based Economy? September 2, 2009 http://209.85.135.132/search?q=cache:oxySCOzPnpwJ:www.cesifo- group.de/DocCIDL/forum2-08- focus1.pdf+Russian+federation,+reliance+on+natural+resources+to+facilitate+an+ec onomic +recovery&cd=2&hl=en&ct=clnk&gl=ke Dąbrowski, Marek and Antczak, Rafał. (1995). Economic Transition in Russia, the Ukraine and Belarus in Comparative Perspective. Retrieved September 2, 2009 http://209.85.129.132/search?q=cache:rFphRiPD9qIJ:www.case.com.pl/upload/publi kacja_ plik/3459873_050.pdf+ukraine+economic+transition&cd=1&hl=en&ct=clnk&gl=ke Econ.ohio-state. (2006). Foreign Direct Investment in Russia. Retrieved September 2, 2009 http://209.85.129.132/search?q=cache:WvKTrHfGrU0J:www.econ.ohio- state.edu/Fleisher/courses/econ508/wi05/docs/stu/AutreyFDIRus.ppt+FDI+in+RUSSI A&cd=1 &hl=en&ct=clnk&gl=ke Emerson, Michael et al. (2006). Democratisation In The European Neighbourhood. CEPS. p 160. Forbes.com. (2008). Ukraine: Currency Slide Stalls Foreign Investment. September 2, 2009 http://www.forbes.com/2008/12/10/ukraine-currency-stabilization-biz- cx_1211oxford.html Fridman, A. and Verbetsky, A. (2009). Currency substitution in Russia. Retrieved September 2, 2009 http://www.gdnet.org/cms.php?id=research_paper_abstract&research_paper_id=3707 Gill, Graeme J. and Markwick, Roger D. (2000). Russias Stillborn Democracy?:From Gorbachev To Yeltsin. Oxford University Press. Edition illustrated. pp214, 215. Lewis, Nathan K. (2007). Gold: The Once And Future Money. John Wiley and Sons. Edition illustrated. p 358. Liuhto, Kari T. (1999). Transformation of Soviet Enterprises and Its Management: A Literature Review. Retrieved September 1, 2009 http://209.85.129.132/search?q=cache:T9KCsAIJ1P4J:www.cbr.cam.ac.uk/pdf/WP14 6.pdf+P aul+Hare,+Mohammed+Ishaq,+Saul+Estrin,+The+Legacies+of+Central+Planning+a nd+the+Tr ansition+to+a+Market+Economy:Ukrainian+Contradictions&cd=4&hl=en&ct=clnk& gl=ke Marxists.org. (2009). Bourgeoisie. Retrieved September 1, 2009 http://www.marxists.org/glossary/terms/b/o.htm Ogutcu, Mehmet. (2002). Attracting Foreign Direct Investment for Russia’s Modernization. Retrieved September 2, 2009 http://docs.google.com/gview?a=v&q=cache:78SSWV5Yd- kJ:www.oecd.org/dataoecd/44/45/1942539.pdf+FDI+in+RUSSIA&hl=en&gl=ke Organisation for Economic Co-operation and Development. (2007). OECD Economic Surveys: Ukraine 2007. OECD Publishing. pp123, 124. Organisation for Economic Co-Operation and Development. (2004). Oecd Economic Surveys Russian Federation. OECD Publishing. p 130. Reuters.com. (2009). Research and Markets: Nationalisation and Privatisation: Two Industry Development Tendencies Within Russia’s Oil and Gas Industry. Retrieved September 2, 2009 http://www.reuters.com/article/pressRelease/idUS73207+26-May- 2009+BW20090526 Ross, Cameron. (2008). Urban Politics and Democratisation In Russia. Routledge. p1. Schwoediauer, Gerhard et al. (2006). Recommendations for Economic Reform in Ukraine. 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