UKRAINIAN ECONOMIC REVIEW
Volume I, No. 1-2, 1995
EXTERNAL SHOCKS AND PERFORMANCE RESPONSES DURING SYSTEMIC TRANSITION
The Case of Ukraine
F. Desmond McCarthy
The World Bank
Washington, D.C. 20433
Ukraine encountered many economic problems in its first years of independence.
Most serious among external shocks were the collapse of trade with the
former Soviet Union and sharp price increases for energy imports. External
shocks resulted in an income loss in the current accounts equivalent to about
14 percent of GDP a year in 1992 and 1993.
Ukraine did not adopt an appropriate strategy for dealing with the
impact of these shocks. Its main policy response has been to continue
borrowing, increase arrears, postpone adjustments, and restore administrative
interventions. Note only has this policy flight and rapid expansion of the
With the limited information available, McCarthy, Pant, Zheng, and
Zanalda try to identify the major sources of external shocks and to estimate
their impact on the current account. They also evaluate Ukraine's policy
Based on examination of the experience of other countries in
addressing adverse shocks, the authors recommend the following policies:
Full commitment to systemic reform and macroeconomic stabilization.
Privatization, price liberalization, development of a competitive market
system, and reform of the legal system.
For the particular situation of Ukraine, they emphasize the importance of:
Greater economic (especially energy) efficiency.
Integration into world systems of trade and finance.
Prudent borrowing and debt management strategies, as well as policies to
encourage private foreign direct investment and to make more efficient use
of foreign debt.