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The East: Analysis From Washington - Economic Consequences Of Political Campaigns

Washington, 16 August 1999 (RFE/RL) -- Election campaigns can unsettle a country's economy not only because they raise the specter of policy changes but also because they encourage incumbents to adopt policies to generate short-term electoral support without regard for their longer-term economic consequences.

That pattern holds even in long-established democratic countries, but as recent developments in Kazakhstan, the Russian Federation, and Ukraine show, it can be especially severe in post-communist countries whose economies are shaky and whose political systems are far from fully institutionalized.

In Kazakhstan earlier this year, President Nursultan Nazarbayev introduced a number of measures just prior to the elections intended to stabilize his country's economic situation and thus win him additional support at the polls. But as many observers noted at the time, whatever short-term political benefits these measures might bring would be swamped by their impact on the economy over the longer haul.

Indeed, both foreign and domestic firms showed that they understood that possibility. During the campaign, they reduced their investments in Kazakhstan. And since the election, they have cut back still further as Nazarbayev's campaign-driven measures are proving ever more counterproductive economically.

More recently in the Russian Federation, President Boris Yeltsin has sought to introduce policies that will generate at least some support for him and thus prevent the defeat of his supporters in the December 1999 elections and a loss by those who might continue his approach in the presidential poll next summer. But because of some specific features of the Russian landscape, the linkage of elections and the economy there have taken on a somewhat different form.

On the one hand, Yeltsin has made a series of new concessions to the business oligarchy that helped gain him reelection last time. But this effort may be backfiring. As one Russian analyst noted last Thursday, controlling the media may not be enough this time around -- particularly if the product is something no one wants to buy.

On the other hand, Yeltsin has used the possibility of the retreat of reformers in the upcoming elections to extract more money and some understanding from the international financial community. Such funds may not be sufficient to overcome Russia's current economic difficulties, but any withholding of them almost certainly would make things worse -- something even most of Yeltsin's opponents are prepared to concede.

And because of both Yeltsin's all-too-obvious political calculations and because of a growing sense by foreign investors that Russia is unlikely to prove to be the emerging market that Moscow and others had advertised, foreign investment does not appear likely to take off anytime soon.

Ukraine provides the latest and clearest example of this interrelationship between campaigns and economics. Last Thursday, Kyiv reported some of its worst economic figures ever. For the first six months of 1999, the State Statistics Committee said, foreign direct investment fell by half compared to a year earlier, foreign trade fell by 25 percent, and the GDP declined by three percent.

Not surprisingly, this bad economic news pushed the national currency down and outside the trading range that the Ukrainian authorities had pledged to keep it within for all of 1999. That in turn led to speculation both in Ukraine and abroad that Kyiv would soon be forced to accept an even greater devaluation of the hryvna. Most analysts in both Kyiv and the West blamed Ukraine's current fix on the failure of Ukraine to complete economic reform and on its inability to defend itself from the consequences of the economic turmoil in Russia, which remains Ukraine's largest trading partner.

But many of the experts said that Ukraine's current economic problems would be compounded by the ongoing presidential campaign. The Ukrainian vote will increase uncertainty among investors, thus reducing the money needed to power an economic recovery.

But far more important and negative, they suggested, will be the fall-out from political infighting between the incumbent president who is seeking reelection and the parliament which opposes him. The former may seek to introduce economic changes that will generate immediate political support for himself, and the latter may oppose such steps precisely to win political advantage, even at the cost of still worse economic growth.

And just as in Kazakhstan, the Russian Federation, and several other post-communist states, this linkage of political campaigns and economic performance in Ukraine may have large and unpredictable consequences for both politics and economics there.