Ukraine's economy freer, but stalled, say economic reports (10/30/05)

Ukraine's economy freer, but stalled, say economic reports

by Andrew Nynka

PARSIPPANY, N.J. - The Ukrainian economy, once booming but now largely stalled in the aftermath of the Orange Revolution, is freer than it has been in at least a decade, say several economic reports released recently. The findings of the research are significant because the studies also suggest that economic freedom is more effective than democracy in diminishing violent conflict.

One study, conducted by the Fraser Institute in Canada, ranked economic freedom within countries on a scale of 1-10, with 10 being the most free. In 2003, the most recent year studied, Ukraine scored a 5.5 and ranked 105th out of 127 countries. This is a significant improvement from 1995, when Ukraine scored a 3.4 and was ranked last among the 123 countries evaluated. The average economic freedom score for all of the countries included in the report was 6.4 in 2003.

In 2000 Ukraine moved up to a 4.7 rating and ranked 116th out of 123 countries. In 2001 it moved up to a 5.0 and its rank did not change from the previous year. In 2002 Ukraine scored a 5.4 and ranked 109th out of 123 countries. The study was first conducted in 1995.

A report from that study, titled "Economic Freedom of the World: 2005 Annual Report," examines the degree to which the policies and institutions of given countries support economic freedom.

According to the authors of the report, the ranking of economic freedom within a country was based on a number of factors. Among them were individual choice, the voluntary exchange of goods and services, the freedom to compete, and the security of privately owned property.

The study was conducted in conjunction with independent research and educational institutes in over 60 countries, including the Ukrainian Center for Independent Political Research based in Kyiv.

In one of the more interesting findings, the report said that "when measures of both economic freedom and democracy are included in a statistical study, economic freedom is about 50 times more effective than democracy in diminishing violent conflict."

In a statement released together with the report on September 8, James Gwartney, a co-author of the report and a professor of economics at Florida State University, said that stable democracies tend to have high levels of economic freedom, which led to the question of whether democracy or economic freedom affects the chances of violent conflict.

"Researchers have long known democracies go to war about as often as other nations but tend not to go to war with each other," Mr. Gwartney said. "The impact of economic freedom on whether states fight or have a military dispute is highly significant, while democracy is not a statistically significant predictor of conflict."

Though the Fraser Institute's report is a positive indicator for Ukraine, President Viktor Yushchenko has still had to contend with the reality that his country's economy is cooling quickly.

Ukraine's Gross Domestic Product (GDP) has slumped from 6.5 percent in January to just 1.6 percent in August, Mr. Yushchenko said during the International Economic Forum held at Lviv's Chamber of Trade and Industry on October 6. GDP, a measure of the value of a country's total output of goods and services, is often used to illustrate a country's economic strength.

While Ukraine's GDP has been falling in the immediate aftermath of the Orange Revolution, the Fraser Institute's study shows that its economy has been steadily opening up since at least 2000.

In this year's index, Hong Kong retained the highest rating for economic freedom, 8.7 of 10, closely followed by Singapore at 8.5. New Zealand, Switzerland and the United States tied for third with ratings of 8.2.

The United Kingdom, Canada and Ireland ranked sixth, seventh and eighth respectively. Australia, Estonia, Luxembourg and the United Arab Emirates tied for ninth. The rankings of other large economies are Germany, 19th; Japan, 30th; France, 38th; Italy, 54th; Mexico, 59th; India, 66th; China, 86th; Brazil, 88th; and Russia, 115th.

The bottom countries were Burundi, Guinea-Bissau, the Democratic Republic of Congo, Venezuela, Zimbabwe and Myanmar. However, a number of other countries for which data are not available, such as North Korea and Cuba, may have even less economic freedom.

Thirty-eight components and subcomponents were used to measure the degree of economic freedom in five areas: (1) size of government; (2) legal structure and protection of property rights; (3) access to sound money; (4) international exchange; and (5) regulation.

The authors also noted that the overall pattern of results did not shift when additional variables, such as membership in the European Union, nuclear capability and regional factors, were added.

The report was co-authored by Robert Lawson, professor of economics at Capital University in Ohio. Erik Gartzke, a political scientist at Columbia University, contributed to the report.

Another study, conducted by the Heritage Foundation and the Wall Street Journal, examined the economic freedom of 155 countries. Ukraine was the second most improved country, giving it an overall rank of 88th, while Madagascar was the most improved, with an overall rank of 48th.

In reference to the region encompassing North America and Europe, the report noted that "Ukraine, though, logged the most dramatic improvement in the region, by reducing its tax burden, easing price controls and accelerating the pace of privatization." The study also found that this was the only region that has no repressed economies.

The "2005 Index of Economic Freedom" looked at the link between freedom and prosperity, and found that "the countries with the most economic freedom also have higher rates of long-term economic growth and are more prosperous than are those with less economic freedom," the Heritage Foundation said on its website.

The study measured 161 countries against a list of 50 independent variables that were grouped into 10 categories. The editors did not grade five countries because they are currently in a state of "civil unrest or anarchy." Those countries were Angola, Burundi, Congo, Sudan and Iraq. Serbia and Montenegro also was not graded because of a lack of reliable data.

The 10 categories measured were trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation and informal (or black) market activity.

The top five most economically free countries were Hong Kong (first), Singapore (second), Luxembourg (third), Estonia (fourth) and Ireland (fifth).

"Perhaps the greatest surprise in this year's index is the failure, for the first time, of the United States to make the top 10," a statement from the Heritage Foundation said. "Although its score remains unchanged from last year, and it is still classified as free, the United States - now in a tie for 12th place with Switzerland - has been 'treading water,' according to the editors, and hence has been surpassed by countries willing to open their economies still further."

The five least economically free countries were Turkmenistan and Zimbabwe (tied for 151st), Libya (153rd), Burma (154th) and North Korea (155th).

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