Reform of the economic policy making: the key to Ukraine’s economic development US–Ukraine PDP Economics and Business Task Force International Centre for

Reform of the economic policy making:

the key to Ukraine’s economic development

US–Ukraine PDP Economics and Business Task Force

International Centre for Policy StudiesKyiv, 14 November 2005

Presentation plan

• June recommendations: evaluation, current status

• Ukraine’s economic and political developments

• Tips for the Task Force

Міжнародний центр перспективних дослідженьInternational Centre for Policy Studies

Tel. (380-44) 484-4400Web: www.icps.kiev.ua

What is the International Centre for Policy Studies?

• ICPS is an independent research organization, founded by the Soros-funded Open Society Institute in 1994

• Our goal is to promote public policy concepts and procedures in Ukraine

• ICPS works with different interest groups — government, business, NGOs, mass media

• The ICPS web-site can be found at www.icps.kiev.ua/eng



June recommendations: evaluation, current status

Four key recommendations still relevant

1. Create a uniform public vision of economic reforms for the President and the Government of Ukraine

2. Build institutional capacity of Ukrainian Government for the implementation of radical, systematic and sustainable market economic reforms

3. Enhance property rights protection, strengthen the rule of law and reduce the tax burden

4. Increase integration into global economy



1. Uniform public vision of economic reforms is

absent • New Government’s announced priorities fully comply with those announced by President

• Most of them are short-term priorities• The Government doesn’t envisage complicated yet

vital major economic reforms• The Government hasn’t produced any written policy

document laying out strategic economic priorities• Politicians’ statements and actions very inconsistent



2. Reform of policy making not recognized as urgent

priority• Neither the new Government nor the President think about inadequacy of existing policy making machinery

• Unsystematic reform attempts have false focus• Business community and civil society don’t

recognize this problem• Foreign donors don’t have it on their agendas• Institutional capacity for effective policy making is

low, any administrative restructuring makes no sense without it



3. No practical results of legal reform intentions yet

• Re-privatization issue is not closed• President’s Decree of 28 October 2005 commands

the Government to prepare new law on Joint Stock Companies, and consider canceling the Commercial Code

• No strategy for legal or judicial reform for the Government or the President

• Parliament rejects any tax changes in 2006 Budget• Business-unfriendly tax administration procedures

and corruption are much more harmful than tax rates



4. WTO accession stalls

• Government’s negotiation group reinforced• Parliament’s support for 8 outstanding WTO

accession laws uncertain• Strong opposition by leftists and agro lobby• Government lacks meaningful public campaign to

support WTO accession • Ukraine formally resolved most of US concerns except

poultry• No actions by US side in response: no progress on

signing WTO bilateral protocol or Jackson–Vanik Amendment cancellation



Ukraine’s economic and political

developments

Current pictureThe “Orange Team” in power so far wasted favorable

socio-economic conditions and time for reforms. Implementation of President’s election commitments is poor. As a result:

• The “Orange” coalition has split• Growing disappointment in the President and the

Government• The ratings of the “old” opposition are growing• Public support for political leaders and their parties at

2006 Parliament elections fragmented• Economic growth much slower than in 2004



New environment for the government

• Post-revolutionary freedom from fear of power, freedom of media, freedom of political competition and political choice created new unthinkable challenges for non-reformed government

• Vertical and command structure of the government machinery is unable to work in a new competitive environment and deal with the pressure of all legitimized interests

• Government needs new capacity and procedures to fill the gap dividing it from active and impatient civil society:- the analysis of policy decisions’ consequences- the analysis of stakeholders’ reactions to decisions and actions- effective organized policy consultations with stakeholders- transparent and formalized lobbying through legislative process



Economic indicators are showing a downward trend

• Preliminary results for January–September 2005 show that real GDP grew 2.8% compared to an average 8% for this period in 2002–2004

• Rapid price growth due to rising personal incomes and consumption, and inflationary expectations: 10M’05 inflation was 8.1%, 12-month moving in October’05 was 12.4%

• Foreign and domestic investment is shrinking since late 2004. In H1’05, gross fixed investment (GFI) slipped 1.6%

• Imports grow much faster than exports• After spring revaluation, hryvnia remains stable



Factors behind the economic slowdown

• Global prices for metals have stopped growing

• Business environment has not been improved• Elimination of numerous tax breaks has had a

negative impact (at least in the short-term) on some sectors

• Combined with ongoing re-privatization talks, it deteriorates business confidence



US–Ukraine: economic trends

• The US is a major trading partner: In 2004, it accounted for 4.6% of Ukrainian merchandise exports

• US–Ukraine merchandise trade turnover amounted to USD 1.25bn in 2004

• In H1’05, Ukrainian exports to the US grew 45%, imports grew 69%



Ukraine’s economy’s weaknesses persist

• The domestic market remains underdeveloped due to the openness of the economy: The ratio of exports to GDP is above 60%

• The share of metals in overall exports is over 30%• The development of business is hindered by poor

government–business relations, unfair competition,corruption and high political risk

• Expectations of FDI growth don’t prove• The role of SMEs is too small—only 10% of GDP• Sources of financing for businesses and individuals are

scarce, the range of financial services is inadequate• Material and institutional infrastructure is

underdeveloped



Tips for the Economics and Business Task Force

Worsening economic trends should encourage transformations• We don’t expect significant improvement of

external situation for Ukraine’s economy• Therefore, increasing economic growth is

impossible without major reforms• The Government and the President need to

demonstrate effectiveness and actual achievements

• Upcoming Constitutional reform and Parliament elections are two major challenges for the system of governance



Risks for the economic situation and reforms

• Russia’s and Turkmenistan’s intention to sharply increase natural gas prices threaten Ukraine’s competitiveness

• President’s and Government’s concentration on securing unconditional support for President’s party will lead to increasing political instability before and after the Parliament elections

• In such conditions the issue of Government’s capacity for economic reforms will be further avoided



ICPS’ view for economic reform priorities

• Government and President should concentrate on preparing high-quality President’s Appeal to the Parliament that clearly specifies President’s vision for strategic reforms

• Budget for 2006 and budget resolution for 2007 should be improved to secure macrofinancial stability

• Commercial Code should be cancelled and Joint Stock Company law enacted

• Government should present a specific list of companies, privatization of which is going to be reviewed, and guarantee that the ownership of any other assets would be protected

• Government should officially start preparation and public campaign for negotiations with EU on Free Trade Area

• President should prepare and publicly present clear position and principles for forming majority coalition in new Parliament

• Government should improve customs procedures to encourage investments of major high-tech manufacturers

• President Yuschenko should take charge of reaching natural gas deal with Russia and Turkmenistan



ICPS’ role in economic reform priorities

• ICPS has a capacity for policy analysis and public policy campaigns that is unique in Ukraine

• ICPS’ independent policy analysis and forecast disseminated through regular publications: Quarterly Predictions, Political Commentary, Consumer Confidence, Economic Statistics, and ICPS Newsletter

• ICPS constantly provides technical assistance to the government on implementing public policy procedures, as well as analytical support

• ICPS is doing feasibility study on EU–Ukraine free trade area agreement

• ICPS has done a research and runs public campaign on policy to encourage investments in high-tech manufacturing



Conclusions for the November session of the Project

• Economics and Business Task Force should examine more closely the current status and Government’s economic priorities in meetings with Ukrainian officials

• Recommendations should include precise short-term measures

• Vision for the Project participants’ activities needs to be elaborated



Thank you for your attention!

The International Centre for Policy Studies

Documents

Reform of the economic policy making: the key to Ukraine’s economic development US–Ukraine PDP Economics and Business Task Force International Centre for