Financial Repression as a Policy Choice: The Case of Ukraine, 1992?2000

By their nature, instruments of financial repression distort interest rates, foreign exchange rates, patterns of investment, and the economic incentives of both borrowers and lenders. In order to deal with the economic pathologies introduced by the government’s own credit and financial policies, governments inevitably find that they must intervene further, to ration credit and impose controls, generally on prices, wages, interest rates, foreign exchange rates and other transactions. Not only did Ukraine exhibit all of the symptoms of financial repression in the 1990s, but the basic policy instruments of financial repression also became too familiar in Ukraine. In fact, to one extent or another, in the 1990s Ukraine employed several of these measures (often in combination) as means to suppress the effects of excessive amounts of state consumption, the resultant inflation, and its own credit policies. In the long run, economic growth will suffer, however, because repression reduces the capacity of the financial system to respond to the needs of firms and households in the real economy.