Ed Dolan's Econ Blog

Ukraine or Russia? How Would Economic Factors Influence a Vote?

Last month residents of Crimea voted to secede from Ukraine and join the Russian Federation. Although many in the West have questioned the freedom and fairness of the referendum, which was held in the intimidating presence of Russian troops, no one doubts that many Crimean residents did have a true preference for the Russian option. Historical, linguistic, and cultural considerations were presumably decisive for many voters, but according to reports, economic factors also played a role.

By conventional indicators, Russia is a much wealthier country than Ukraine. According to the latest data from the IMF, Russia’s per capita GDP, measured at purchasing power parity, was $17,884 in 2013. That is nearly two-and-a-half times higher than the $7,423 per capita for Ukraine. Russian wages and pensions are correspondingly higher. Russian Prime Minister Dmitry Medvedev made a point of flying to Crimea soon after the vote to announce in person the decision to raise pensions and wages for government employees to Russian standards.

More votes are coming. Demonstrators in Eastern Ukrainian cities, encouraged by television and political tourists from the Russian side of the border, are demanding referendums similar to that in Crimea. Even if those do not come about, Ukraine as a whole will hold a presidential vote in May that will itself be seen as a referendum on a turn toward the East or toward the West. Whatever the circumstances, economic issues will be on voters’ minds as they set out for their polling stations. Which side of the scales do they weigh on?

GDP vs. Social Progress

Anyone voting on the basis of per capita GDP would mark an X for Russia without hesitation. However, people do not live by bread alone, nor can they eat GDP. It makes more sense to see gross national product as an input to one’s quality of life rather than as a measure of it. That point is brought home by the newly released Social Progress Index (SPI). As Michael  Porter, a Harvard Business School professor who helped develop the index, told The Economist, “There is a view that economic development and social progress go hand in hand. That’s true on average, but not in particular.”

So how does Ukraine compare to Russia in terms of the social progress index? Not badly at all. In fact, if we plot the SPI against GDP per capita, we see that Ukraine comes in ahead of the Russian Federation according to the former, despite lagging well behind it in terms of the latter.

Two things stand out in the chart.

First, in absolute terms, neither Ukraine nor Russia is much of a paragon of social progress. Ukraine, sixty-second among 132 countries rated, ranks just above the global median. That puts it a little below Mexico and Bosnia, and just ahead of El Salvador and Turkey. Russia, in eightieth place, a bit below the median, follows behind Cuba and just ahead of Moldova.

Second, we see that there is a clear correlation between the SPI and GDP per capita. (To be exact, between the SPI and the log of GDP per capita, which is the basis for the trend line in the chart.) However, while Russia lies below the trend line, Ukraine is above it. That raises the hope that if Ukraine could get its economic act together (no small task), it could move upward and to the right. As it did so, it could catch up with Russia’s stagnanting economy in terms of GDP and pass well above it in terms of social indicators. That path would be a win-win for anyone voting to stay with Ukraine, rather than a trade-off between GDP and social progress.

A closer look at social indicators

So far, we have treated the SPI as a single number, but in fact, it is a composite derived from several tiers of sub-indexes. The next chart breaks the SPI down into its three major components, and compares Ukraine’s performance on each both with Russia and with the global median.

We see here that Ukraine scores well on “basic human needs.” This component, on which Ukraine ranks above both Russia and the global median, includes sub-indicators like medical care, water, shelter, and freedom from the threat of violent crime. It again beats both Russia and the global median in terms of “opportunity,” a category that includes political rights, property rights, tolerance, religious freedom, low corruption, and access to higher education. It does least well in “foundations of wellbeing,” where it lags behind both Russia and the global median. That component bundles together a disparate group of indicators including adult literacy, internet access, press freedom, life expectancy, low greenhouse gas emissions and biodiversity.

In some ways, it is hard to know what to make of these three major components. One problem is that they group together very different indicators, for example, literacy with biodiversity. Another is that some of sub-indexes seem assigned rather randomly among the three major components. Why is higher education (opportunity) separated from elementary and secondary education (foundations of wellbeing)? Why is life expectancy (foundations of wellbeing) separated from medical care and infant mortality (basic human needs)? To get around these questions, let’s move down to the next tier of sub-indexes:

This chart shows us that Ukraine does best relative to Russia in the areas of personal rights, personal safety, and tolerance. Note, however, that in all three of them, both countries fall short of the global median. It is safe to say that further progress on these indicators is one of the key hopes of the Euromaidan movement that drove former president Viktor Yanukovich from office.

At the same time, there are areas where Ukraine lags behind Russia. Access to advanced education is better in Russia. Ecosystem sustainability is better in Russia, which should be a real embarrassment to Ukraine, since both countries rank well below the global median.  Finally, Ukraine is shown as ranking behind Russia in access to information and communications. This indicator is a bit misleading, however, since it mixes together press freedom, where Ukraine rates better than Russia, with access to internet and cell phones, where Russia, the wealthier country, is ahead.

The bottom line

The bottom line here is that despite Russia’s far higher GDP per capita, the choice between Ukraine and Russia, if made solely on the grounds of economic and social indicators, is far from a foregone conclusion. If you are a Russian-speaking pensioner, inclined to view the days of your youth in the Soviet Union through rose-colored glasses and forgetful of, or indifferent to, the lack of personal freedoms of those times, it is understandable that you might opt for Russia. But if you are younger and look to Western Europe as a model, it is more likely that you would want to devote your youthful energies to overcoming corruption, mediocre universities, environmental problems, and the many other difficulties that face an independent and democratic Ukraine.

Finally, what can you do if you are observing the Ukrainian drama from afar, without the opportunity to vote either with your feet as a demonstrator or volunteer, or at the ballot box? One thing you can do is let our own political leaders know that Ukraine matters. Vladimir Putin professes to fear military encirclement by NATO, but in the long run, the bigger threat to his system will be encirclement by independent, prosperous, and democratic neighbors. Some of these are in place already, as in the Baltic States and Central Europe. Political, diplomatic, and economic support for the emergent Ukrainian government is a key to extending the chain.

6 Responses to “Ukraine or Russia? How Would Economic Factors Influence a Vote?”

MahknoApril 10th, 2014 at 11:45 am

If you took oil revenues out of the Russian side of per capita GDP, how does that balance out? To what degree does oil distort the picture for Russia? Might Ukraine be on a better footing?

Ed Dolan EdDolanApril 10th, 2014 at 2:04 pm

Oil is a factor. Yes, it is a big part of Russian GDP, but more than that, oil-rich countries sometimes neglect other components of the SPI. I hope to do a separate post on this topic soon.

ThomasGrennesApril 11th, 2014 at 9:47 am

Recent data comparing Ukraine and Russia are informative. However, wouldn't a Ukrainian
resident want to know what the country's income might be in the future under a different
kind of government? At the time Ukraine separated from the USSR, its income was approximately equal to that of Poland. If Ukraine had the kind of government Poland and the Baltic countries have, its income might be similar to those countries and as high or higher than Russia's income.

Ed Dolan EdDolanApril 11th, 2014 at 10:22 am

Yes, governance is definitely the key. Governance on the standard of Poland or the Baltics is, I think, a major hope of those who led the movement for a change of governance.