Economic Reform Lags in Ukraine

KIEV, Ukraine -- President Viktor Yushchenko, who swept into power last January on promises that he would stamp out corruption and press ahead with economic reforms in Ukraine, is making so little headway that foreign investors are staying away and growth is falling sharply.

Economists and analysts say the delay is the result of government infighting as well as a shortage of competent personnel in state administration and the courts.

Ukraine's Prime Minister Yulia Tymoshenko, left, Ukraine's President Viktor Yushchenko, center, and Ukraine's Parliament Speaker Volodymyr Lytvyn durinfg a news conference in Kiev

Now with presidential powers due to be curbed in September under new constitutional amendments - and fresh parliamentary elections scheduled for next March - the fear among those hoping for a European-style free market in Ukraine is that Yushchenko has very little time left to exert his influence.

"We are a little behind from where we were a half a year ago," said Vladimir Litvin, the influential speaker of the Parliament.

"Our actions are often convulsive," he said Saturday at a conference organized by the Yalta Europe Strategy, a group that support's Ukraine's eventual membership in the European Union.

"We are not pro-active concerning the challenges. We don't have the concepts or programs for Ukraine's development over the next 10 years."

The biggest casualties so far, economists say, have been the process of privatization and efforts to clarify property rights and to make the banking system flexible and transparent.

Much of the problem, they say, is within the government and the courts, which are struggling with disputes over the privatization and renationalization of enterprises. Although a new, reform-minded elite has emerged - as evidenced by the burgeoning of independent research groups and economic and political institutes - this new generation so far is mostly remaining outside government, stepping forward only as advisers.

"There is a real lack of institutional capacity," said Alexander Sushko, director of the Center for Peace, Conversion and Foreign Policy of Ukraine. "There is simply not enough personnel around ministers who want to introduce reforms."

Yushchenko, who wants to integrate Ukraine into the world economy as soon as possible, defeated Viktor Yanukovich, his conservative archrival, amid huge protests demanding free and fair elections.

After taking office, Yushchenko said he would not pursue a witch hunt against those who bought enterprises under dubious circumstances from the former government.

Prime Minister Yulia Timoshenko, however, has started to renationalize some of the companies. Her aim, economists say, is to curb the powers of the oligarchs, most of whom supported Yanukovich in the presidential elections.

One recent renationalization was the profitable steel maker Kryvorizhstal.

It was sold in June 2004 to a consortium controlled by Viktor Pinchuk, one of the six oligarchs and a son-in-law of Leonid Kuchma, who resigned as president late last year. Pinchuk's $800 million bid beat out one of $1.5 billion from U.S. Steel and its Dutch partner, Mittal Steel.

Pinchuk, a member of Parliament and chairman of the giant Interpipe, declined to comment on the recent renationalization.

"I don't want to make a political issue out of it," he said.

He has been fighting in court to get the plant back but suffered another setback this week. A Ukrainian appeals court on Tuesday upheld a decision declaring the original auction illegal, The Associated Press reported.

The court ordered the controlling stake to be returned to the state and told the government to return his purchase price after the steel maker is resold. Timoshenko announced last month that it would be reprivatized.

This month, a plan to privatize Ukrtelecom was halted amid concerns it was not ready.

Timoshenko then announced last week that only 42 percent would be sold, leaving a controlling stake in state hands, according to the Prime-Tass news agency.

The latest forecasts by the Institute for Economic Research and Policy Consulting show that the uncertainty about privatization is already contributing to reduced investment and low growth. It said real growth in gross domestic product is forecast to be around 4 percent in 2005, well down from 12 percent last year. Forecasts for unemployment are not yet available, but the rate rose to 8.7 percent during the last quarter of 2004, compared with 8.1 percent in the previous quarter.

Efforts to clarify privatization and property issues have also become bogged down in ideological battles inside the coalition government. The government was hastily put together in January from the legislators who belonged to the previous Parliament.

The privatization agency, the property rights agency and the agricultural ministry are under the control of Timoshenko's Socialist Party. This partly explains why Yushchenko, head of the party Our Ukraine, has been unable to influence policy as much as he would have hoped.

With parliamentary elections scheduled for March, the government is also treading cautiously because it fears that nonreformers could regroup and form an alliance with supporters of Yanukovich and other leftist parties.

"We must not forget that 44 percent voted against Yushchenko in the presidential elections," said Alexander Rahr, director of Research at the German Council on Foreign Relations and who works closely with Ukrainian reformers.

Source: International Herald Tribune