Energy Policy and Structural Reform

Abstract

Almost ten years after Ukraine's independence, its energy sector remains a major obstacle to structural change and economic development in Ukraine. After two years of stop-and-go policy, in the fall of 1994 Ukraine started a new attempt at transforming to a market economy. Newly elected President Leonid Kuchma led the way to serious stabilization efforts and to an agreement with the International Monetary Fund (IMF). The period 1995-96 saw a significant reduction of inflation based on a tight monetary policy and a sounder fiscal policy. Unfortunately, the progress in structural reforms has not corresponded to the comparative success of macrostabilization. Institutions and regulations have been only slowly adjusted to a market economy, the speed of privatization has been much slower than had been hoped, and red tape still abounds at all levels of the economic hierarchy. Thus, in fall 1998, Ukraine was forced to follow Russia into financial instability from which it has not recovered in late 1999. Despite many persistent bureaucratic hindrances, the structure of the Ukrainian economy has changed a great deal since planning was abolished. As expected, the service sector expanded quite rapidly, although not sufficiently to compensate for the output decline in other sectors. Concerning structural change, much attention and money were lavished on the energy sector. Energy is considered a strategic branch because the economy as a whole is highly