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Improving Ukraine

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Title: Improving Ukraine


1
Improving Ukraines Investment Climate
Dr. Edilberto Segura SigmaBleyzer, The Bleyzer
Foundation January 2008
v2
2
Economic 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
3
Medium 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.

4
Break-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.

5
Ukraine 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.
6
Improving 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

7
Future 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).

10
Ukraine 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.

11
1. 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

12
2. 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.

13
3. 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.

14
4. 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.

15
5. 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.

16
6. 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.

17
7. 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.

18
8. 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.

19
9. 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.

20
Overall Investment Drivers Country Ratings
21
The 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.

22
High 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.

23
Policies 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
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