Title: Improving Ukraine
1Improving Ukraines Investment Climate
Dr. Edilberto Segura SigmaBleyzer, The Bleyzer
Foundation January 2008
v2
2Economic Performance
- Between 2001 and 2006, few countries showed
the following combination of economic
achievements - High average rate of economic growth
- Low fiscal deficits
- Moderate inflation rates of about 10-12 pa
- Good external fundamentals (with large surpluses
in the current account) - Fairly stable foreign exchange rate
- High international reserves in excess of three
months of imports - Very low ratio of external public debt to GDP
- However, 2007 already showed some signals of
economic, disequilibrium both external (with a
3.0 CA deficit) and internal (with inflation at
16.6).
2001 2002 2003 2004 2005 2006 2007(e) 2008(f)
Real GDP Growth 9.2 5.2 9.6 12.1 2.7 7.3 7.3 5.5
Fiscal Balance ( GDP) -0.3 0.7 -0.2 -3.2 -1.8 -0.7 -1.8 -2.0
Consumer Inflation (eop) 6.1 -0.6 8.2 12.3 10.3 11.6 16.6 13-15
Exchange Rate (Hr/, eop) 5.30 5.33 5.33 5.31 5.05 5.05 5.05 5.05
Current Account (bn) 1.4 3.2 2.9 6.8 2.5 -1.6 -4.0 -10.0
(as of GDP) 3.7 7.5 5.8 10.6 2.9 -1.5 -3.0 -5.5
International Reserves (bn) 3.1 4.4 6.9 9.5 19.4 22.3 32.5 34.0
Foreign Public Debt ( GDP) 26.3 24.1 21.3 18.7 13.4 11.9 10.0 9.0
Source State Statistics Committee of Ukraine,
National Bank of Ukraine, Ministry of Finance of
Ukraine, The Bleyzer Foundation
3Medium Term Outlook
- Past economic growth was supported by increases
in private consumption (which grew in 2004-2007
by around 16), fixed investments (surging on
average by around 17 in 2004-2007) and export
growth in 2004, 2007. - The increases in private consumption were
associated with major increases in pension
payments and public wages approved by the
government, as well as continuing credit boom
(surging in 2004-2007 by almost 60 p.a.). - Exports benefited from high metal and chemical
prices and reasonable external conditions for
other commodities (i.e., machinery and transport
equipment). - Unfortunately, consumption and export as a
sources of growth are unlikely to be maintained
in the future - Consumption increases are already been reflected
in high inflation. - Export prices for metals are unlikely to increase
in the future. - Therefore, over the medium term the country will
not be able to rely on increased private
consumption and exports as the main engines of
growth. - In order to achieve strong and sustainable
economic growth in the long-run the country will
require new investments and technology. - This will require major improvements in the
investment climate.
4Break-through to knowledge based economy
- To ensure sustainability of the economic growth,
Ukraines top priorities for 2008-2009 should
include comprehensive efforts to improve
countrys investment climate, stimulate
investments in knowledge and innovations, other
structural changes in order to boost productivity
growth - Based on extensive theoretical and empirical
research, there is a broad recognition among
economists and policy-makers of the positive
impact of human capital, RD, technological
progress and innovation on productivity and
economic growth - In order to advance towards the knowledge-based
economy, Ukraine needs to invest in high
technology sectors and promote knowledge
diffusion across economy. Investments in the
knowledge-based economy must be channelled into
(i) highly-skilled human capital (ii) capacity
and quality of education systems (education
spending and life-long learning), (iii) purchase
of new capital equipment that spread innovative
technologies and managerial know-how.
5Ukraine in Global Competitiveness Index 2007-2008
Source World Competitiveness Report 2007-2008
According to the latest World Competitiveness
Report, weak technological readiness of Ukraine
continues to exact a visible toll on countrys
competitive position. Hence, encouraging foreign
investments into the high technology sectors is
key to maintain and advance countrys global
competitive advantages.
6Improving the Countrys Business Environment
- The governments program should include measures
in the following areas - Public and Corporate Governance
- Macroeconomic Stability
- Stable and Predictable Legal Environment
- Liberalization and Deregulation of Business
Activities - Removal of International Capital Foreign Trade
Restrictions - Facilitation of Business Financing by the
Financial Sector - Reduce Corruption
- Country image
- Political risks
7Future Reform Agenda for Ukraine
- 1. Implement a fundamental public administration
reform - The weaknesses of Ukraines public administration
including cumbersome decision-making,
bureaucracy, unclear and overlapping
responsibilities -- are major constraints in the
implementation of economic reforms. The country
can design policies, but fails in implementation.
Without public administration reform, it is
likely that needed economic reforms will be
implemented very slowly or will be reversed
quickly. - A reform of public administration should include
the following - clearly define the Objectives/Role of the
Government limiting it to public goods and
support - not substitution of the private
sector - Undertake a comprehensive audit of all
government programs, with a view to transfer some
of them to local governments, sub-contract others
to the private sector and eliminate
unnecessary/overlapping activities. - develop the concept of well-defined Programs and
Projects for all government activities (this
will help to improve administrative efficiency,
deal with corruption and also bring equilibrium
to the fiscal budget) - Improve the efficiency in retained core
government activities and local governments,
increasing public transparency and access to
government information. - Carry out a civil service reform introducing
effective "Incentives" and "Control Systems
8.Future Reform Agenda for Ukraine
- 2. Improve macroeconomic Stability by
strengthening fiscal policies (improving tax
administration, reforming the pension system,
decentralizing financing), monetary policies
(developing techniques for inflation targeting
open market operations, forecasting models) and
foreign exchange rate policies (abandoning the
exchange rate anchor) - 3. Improve the legal environment by
- Improving the practice of public consideration
of any legislative act to be adopted, including
their correspondence with existing legislation. - Ensure the independence of the Judiciary by
further improvement of the financing of courts. - Improve court administration and enforcement
procedures. - Deal expeditiously with issues of illegal
corporate raidering. - 4. Accelerate further quick deregulation and
liberalization of business activities (permits,
licenses).
9.Future Reform Agenda for Ukraine
- 5. Develop sound Corporate Governance practices
by enacting key pending legislation (e.g., the
Joint Stock Companies law), abolishing the
Commercial Code while amending the Civil Code,
developing corporate governance codes, and
accelerating the adjustment of Ukrainian
accounting standards to international accounting
standards. - 6. Liberalize trade, join the WTO, sign free
trade agreements with the EU, CIS, and other
countries, and simplify trade clearance
procedures. - 7. Strengthen the Financial Sector, particularly
by enforcing banking regulations and supervision.
- 8. Implement a prevention program to deal with
Corruption - 9. Improve the countrys image by strengthening
an Investment Promotion Agency and implement
specific activities for large investors (identify
major projects, carry out targeted promotional
campaigns, identify niches/sectors) and for
small/medium firms (access to bank credit, better
information on laws, etc).
10Ukraine is an Attractive Country for Investment
- Highly educated labor force (almost 60
university enrolment) - Low wages
- Border on the EU, with increasing trade potential
- Large domestic market (large population with
growing purchasing power) - Great agricultural potential
- Industrial and high-tech potential
- Likely prolonged period of significant economic
growth - Inefficiently run companies provide significant
opportunity for value creation through improved
operations, marketing, finance, customer and
quality focus bottom line growth - Growing interest in the country by multinationals
and other investors - Ukraine is the only post-Soviet country (in
addition to the Baltic states) that is rated by
Freedom House as a free country - But there is strong competition to attract FDIs
and Ukraine has a below average investment
climate, as shown in the following country
ratings of investment climates.
111. Public and Corporate Governance
- CORPORATE GOVERNANCE
- Accelerate the adoption of the Joint Stock
Company Law - Speed up the adjustment of Ukrainian accounting
standards to international accounting standards. - Remove inconsistencies between the Civil and the
Commercial Codes by eliminating the Commercial
Code and passing some of its provisions to the
Civil Code. - Develop corporate governance codes.
- PUBLIC GOVERNANCE
- Redefine the Government's Role towards Supporting
Private Sector Activities - Undertake a comprehensive audit of all
government programs, with a view to transfer some
of them to local governments, sub-contract others
and eliminate unnecessary/overlapping activities. - Improve efficiency in retained core government
activities and local governments, increasing
public transparency and access to government
information. - Carry out civil service reform introducing
effective "Incentives" and "Control systems
122. Macroeconomic Stability
- Pursue sustainable fiscal budget policies,
including improvements in tax administration and
expenditure controls, reform of the pension
system, and decentralization of
financing/execution of some government
activities. - Pave the way for adopting monetary policy based
on inflation targeting. - Strike a reasonable balance between social,
political and economic dimensions of policy
decisions.
133. Stability and Predictability of the Legal
Environment
- Improve the practice of thorough consideration of
any legislative act to be adopted, including
their correspondence with existing legislation. - Ensure the independence of the Judiciary by
further improvement of the financing of courts. - Improve court administration and enforcement
procedures. - Drastically enhance enforcement of rights and
contracts.
144. Liberalization and Deregulation of Business
Activities
- Secure effective implementation of the second
phase of the quick deregulation strategy. - Increase stability of existing regulations by
avoiding frequent changes in legislation
concerning business activity. - Improve coordination between central and local
government bodies on regulatory policy issues by
avoiding conflict of interests between different
levels of executive power and making clear
distinctions in the area of their
responsibilities.
155. Liberalization of Foreign Trade Capital
- Ensure entry into the WTO as soon as possible.
- Promote signing free trade agreements with the
EU, CIS and other countries. - Continue streamlining customs procedures and
formalities to ensure prompt consideration and to
avoid opportunities for rent seeking behavior. - Soften export restrictions and eliminate import
nontariff restrictions. - Ease the system of certification and
standardization to acknowledge international
standards.
166. Financial Sector Development
- Better enforce banking regulations and
supervision - Ensure equal "playing conditions" for domestic
and foreign banks. - Provide mechanisms to deal with risky unsecured
debts issued by commercial banks - Encourage stock market transactions to be made on
the organized market. - Stimulate development of nonbanking financial
sector by introducing a framework law on
nonbanking financial institutions.
177. Corruption Level
- Implement a corruption prevention program,
including public administration reform to improve
transparency of decision making process and
procurement procedures. - Reduce the ambiguity and discretion of government
regulations and raise accountability of the
public servants for their decisions by
introduction of e-governance resources. - Strengthen the capacities of the internal audit
and make it fully accountable for public. - Accelerate the creation of independent
anticorruption agency.
188. Country Image
- Strengthening an Investment Promotion Agency and
implement specific activities for large investors
(identify major projects, carry out targeted
promotional campaigns, identify niches/sectors)
and for small firms (access to bank credit,
better information on laws, etc). - Resolve outstanding investment disputes with
foreign investors ensure fair treatment of
foreign investors in courts. - Engage the country's embassies and other missions
to disseminate up to date information on Ukraine
and its business opportunities.
199. Political Risks
- Take measures to eliminate power abuses at
different levels of government. - Accelerate Public Administration Reform.
- Ensure predictability and public consensus on
political reforms in the country. - Ensure political stability by developing a long
term strategy on establishing the effective
balance of powers and sustainable civil society. - Achieve balanced distribution of gains from
economic and structural reforms. Avoid
disproportionate allocation of economic and
social hardships to selected groups of
population.
20Overall Investment Drivers Country Ratings
21The Role of Techno Parks
- Poorly designed Industrial and Technology Parks
have failed in many countries, including the Free
Economic Zones of Ukraine. - The weaknesses in Ukraine included
- Patchy legal framework, with contradictory
regulations, which frequently resulted in tax
evasion and abuses of tax and customs privileges. - Ad hoc incentives and tax privileges led to
distortions and rent-seeking behavior. - Week infrastructure and technology support.
- Lack of seed capital for start-up companies.
- Poor management and administration of the parks,
with overlapping responsibilities and many cases
of corruption. - As a result, these initiatives were abandoned in
Ukraine. - Nevertheless, required improvements in Ukraines
overall countrys investment climate will take
time, even if pursued energetically. - International experience shows that prudent
administration of Industrial and Techno Parks
helps to trigger country-wide liberalization of
business environment and promote technological
development. - Therefore, in the meantime, the government could
use well-designed Industrial and Technology Parks
as pilots to accelerate investments and
technology innovation.
22High Potential For Knowledge Economy in Ukraine
Ukraine Selected Technology Indicators
percentage of surveyed countries performing
worse than Ukraine
- Despite obvious technological bottlenecks,
Ukraine possesses key resources that, under
adequate management, can trigger successful
development of technology and innovations - Highly educated and low cost labor force
- High enrollment rates in universities and
exceptionally strong educational and research
potential in engineering, cybernetics,
programming and mathematics - Established tradition of scientific and applied
industrial research - Developed network of research and educational
facilities.
23Policies to Develop Technology Parks in Ukraine
- By Law, the government established 16 Technology
Parks in various Oblasts. - But not all are operative, and most face
weaknesses that undermine their growth, including
poor infrastructure, poor property rights and
lack of investments and financing. - To seriously developed Technology Parks, the
Government should - Cooperate with the private sector to develop a
national vision and strategy on science and
technology. - Entrust the management of these parks to a
partnership between private companies and the
government - Develop stable regulations and tax treatments.
- Limit Government support to the needed initial
infrastructure. - Strengthen and simplify customs procedures
- Encourage knowledge transfers through industrial
clusters - Facilitate start ups of innovation companies
- Heavily invest into the human capital
- Liberalize the telecommunications industry