Transcript Analytical center «New social and economic policy

Ukraine 2016: country’s
image and
economic potential
Analytical center
«New social and economic policy»
Iryna Akimova
September 2016
Image of Ukraine in the world and particularly
in Europe is presently dubious
Positive
• The largest (by territory )
country in Europe with a solid
economic base and skilled
working force
• Pro-European mood.
AA and DCFTA+ with EU;
54% of population support EU
integration (06. 2016 , Rating
Group)
• High demand for fighting
against corruption and for
building democratic capitalism
after Maydan.
• Growing- civil society with an
enhanced ability for selforganization
↓
Political and financial support of
Ukraine by the West
Negative
• On-going war conflict in Donbass +annexed ARC → potential source
of instability and migrants to EU
• Slow pace of liberal institutional reforms (particularly , in fighting
corruption -Ukraine remains the most corrupted country in Europe –
130 out 168 in TI ranking)
• On-going political crisis (no stable coalition in the parliament,
frequent changes in government)
• Weak economy (since 2014 inflation amounted 88%, hryvnya lost
70% of its value, GDP dropped by 16% and real income decreased by
30%) with a severe social burden (Pension Fund – 13,4% of GDP)
• Slow and poor implementation of the agreements with international
partners (IMF and related financing from WB, EU)
↓
• Ukraine’s fatigue
o Negative results of referendum on ratification of AA with Ukraine in
Netherlands
o IMF program has been frozen for a year
o NO prospects for EU membership in the next 30-50 years
o Political appeals to abandon Russian sanctions in EU
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High economic potential…
 Land (33% of world’s black-earth soil, #1 in sunflower oil exports globally, #2 world grain exporter after
the US; #3 in corn exports globally)
 Industrial base (#55 out of 141 in UNIDO’s competitive industrial performance index (2013) - ahead of
Croatia, Bulgaria, Latvia, Kazakhstan etc.);
 Dense infrastructural network and favorable transit location (#12 in the world by length of railways; 4 of
10 European transport corridors run through Ukraine, 2 truck days away from EU)
 Skilled labor force (99,7% literacy rate, 70% - have secondary or higher education, top European
country by number of engineer graduates – 130 ths annually)
 ……. which is relatively cheap- the average monthly wage in manufacturing (192$) is 3,6 times lower
than in China (690$) and 5,6 times lower than in Poland (1090$)
 IT potential. #1 in CEE by number of IT professionals (90 000)→ #1 IT outsourcing country in CEE; #3 by
freelance IT outsourcing in the world after US, India
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…that is poorly used and deteriorates
 ATO destructions + deep economic crisis  in 2014- 2015, GDP fell by 16%, industrial production –
by 22%, capital investment – by 31%, building – by 40%, agricultural production – by 2,7%.
 Undiversified export adjusts to the new conditions very slowly:
o
loss in Russian market+ effect of DCFTA with EU is weak due to export barriers& low competitiveness
of Ukraine’s exports in 1H 2016/ 1H2013 export of goods fell by 54,6% (to RF –by 79,9%, to EU –by
21,8%)
o
export is dominated by raw & intermediary products in agriculture and metallurgy (≈2/3 of exports) .
 High unemployment (9,9% in Q1 2016) and a sharp drop in real wages (-25,3% in 2014-2015) 2/3 of
population would like, and 8% are ready to emigrate, TNS July 2016).
 Transport infrastructure deteriorates due to the war and a lack of internationally supported projects
(80% of public automobile roads, 90% of sea-port and rail-road infrastructure have depreciated – MIU;
cargo turnover dropped by 16,3% in 2014-2015).
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...and development gap increases



o
o
Ukraine’s average annual growth rate over the last 25 years is -1,36% compared to + 3,68% in
Poland (IMF)
In 2013-2015, GDP per capita
from 4185$ (current usd) to 2005 $ in 2015 (IMF). It makes only
6.4% of the EU-28 level and 16.0% of Poland (in 1991, Ukraine’s GDP per capita (current usd) was
70,8% of Poland). Presently, Ukraine comes close to world’s poorest countries (≤2 000$, WEF) whose
economies rely mostly on natural resources and unskilled labor.
Ukraine’s perspectives of catching up look gloomy:
Recovery will be slow. Average growth rates projected by IFO’s for the mid run :1%-2016, 3%-2017,
and 4% - in 2018-2019- in 2020 Ukraine’s GDP will be 94.5% of that in 2013.
No quick catch up scenario.
In IMF scenario, Ukraine returns to a sustainable growth path of 4% annually. Projected long-terms
growth rate in EU is around 1.8%--- in 50 years (by 2065) Ukraine’s GDP per capita is 19.3% of the
EU level.
Besides, according to the external debt restructuring agreement of 2015, in 2021-2040 , Ukraine will
pay 0.4 p.p. out of every 1 p.p. of GDP growth above 4% to the creditors .
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2015: Ukraine vs. Poland
GDP, constant prices (%change)
GDP, current prices (U.S. dollars)
GDP per capita, current prices (U.S. dollars)
GDP based on PPP per capita (Current international dollar)
Inflation, end of period (% change)
Export volume of goods and services (% change)
Exports of goods and services (current US$ billion)
Current account balance (% of GDP)
Industry, value added (% change)
Industry, value added (current US$ billion)
Official exchange rate, period average (LCU per US$, % change )
General government gross debt (% of GDP)
Population (Persons, Millions)
Unemployment rate, ILO (Percent of total labor force)
Index of global competativness (WEF)
Ease of doing business (WB)
Index of economic freedom (the Heritage Foundation)
Corruption perception index (TI)
Ukraine
2015
-9,87
90,52
2004,92
7518,82
43,31
-14,19
47,81
-,29
-13,4
19,94
-45,55
79,40
42,76
9,48
79
83
162
130
Poland
2015
3,64
474,89
12495,33
26455,27
-,50
6,54
234,36
-,47
4,8
141,28
-16,44
51,29
38,01
7,50
41
25
39
30
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Restoring Ukraine’s economy &image:
great challenges (1)
Ukraine has lost several windows of opportunities in the past and, presently, faces more
challenges than ever.
Internal:
 Weak political coalition (BPP + People’s Front =223 seats out of necessary 225 + increased conflicts
between BPP and PF ) 
a) no strong ideological platform for the national unity --survey by Rating group for International
Republican Institute, June 2016:
o 71% of respondents believes that the country is going in the wrong direction (vs 48% in April 2014),
o 41% of respondents believes that new prime minister didn’t solve political crisis+ 23% - he deepened it.
b) no strong reform leadership- power struggle instead of reforms + increasing risks of autocratic regime
 Low trust to almost all major institutions
o 46% respondents disapprove+ 35% rather disapprove the performance of Verkhovna Rada;
o 37% disapprove+ 36% - rather disapprove the performance of the President;
o 29% disapprove+ 30% rather disapprove theperformance of the Government.
 No consensus on liberal ideology of economic reforms. Under hardening budget constraints
paternalistic expectations grow due to the absence of quick successes and continuing drop in living
standards (9 mln households out of 16 need subsidization)
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It is time of great challenges for Ukraine (2)

Weak state fails in providing law and order & security of property rights → the number of serious
criminal offences committed in Kyiv ↑ by 60-80% in 2016/2015; Ministry of justice admits that 90% of
raider attacks in 2015 on business were successful.

Slow pace /high social price of reforms  distrust from the international partners + increased social
tension within the country,
….. covered by pressure on political opposition and mass media .Search for the “enemies” /
“separatists  “+ pressure on political opponents and mass media (violence against TV channel ‘Inter”)
+ “anti-oligarchic wars” as an instrument of power redistribution .

 Low investment perspectives , high risks of social unrest, political radicalization and country’s
fragmentation
External:
 Conflict with Russia  lost human lives + economic destruction+ political and economic uncertainty.
 No clear EU-Ukraine perspective . EU is concentrated on its internal problem (Brexit, growth of
Euroscepticism, migrants) + Ukraine’s fatigue
 Globalization skepticism + low global prices on the main Ukraine’s exports + slowing down of global
economy (compared to 90’s and first half of 00’s)  pressure on traditional exports+ difficulties in
searching for the new markets
 Risks that Ukraine shifts from weak to failed state and becomes a source of political and economic
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troubles on EU borders. Potential costs of Ukraine’s ignorance are high
No easy & quick solution 
need for international support
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International support (from US and EU) in peace negotiations. Ukraine-Russia conflict impacts the
whole Europe. Political views on the way to peace within/outside the country differ. New format for
peace negotiations?
Clear vision of the perspective for EU-Ukraine cooperation for the mid term as a signal for potential
investors

Significant economic support from the international community (in particular EU). Since 1991,
Ukraine received 4 bln.US$ as grants/technical aid + 9 bln US$ as development financing from IFO,
MEDT ( to compare: in 2004-2020 Poland receives 317 bln. of financial aid from EU ; ≈ half is already
transferred) Large EU co-financed infrastructure projects and integrating local producers into EU value
chains might become a starting point in Ukraine’s economic recovery.
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o
o
o
o
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National consensus and unity is a necessary condition for further development.
wide national dialogue+ true decentralization path,
strong parliamentarian coalition& sound political leadership for restoring trust in basic institutions,
ensuring freedom of speech&media + respecting political opponents ,
consensus among “oligarchs”+ strong anti-trust policy in the mid term,
Improving efficiency of civil service instead of politically-biased lustration
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No easy & quick solution :
adjustments to the neoliberal agenda

Adjustments to the neoliberal agenda
o
More gradual approach to fiscal consolidation during the shock therapy (softening targets for budget
deficit –to avoid new Greece on the East)
o
Sequencing of reforms for better implementation. E.g. Lowering the rate of social contributions 
lowering the deficit of Pension Fund in the mid run.
o
Compensation package + efficiency incentives for painful reforms. E.g. raise in tariffs for communal
utilities  transparent tariff setting, incentives of cost reduction for service producers, appropriate
state support for energy efficiency.
o
Combination of horizontal reforms with the pro-active industrial policy. Selective state support of
sectors/activities/ clusters as a compliment to liberal reforms (e.g. FEZ, industrial parks in Poland) + soft
(smart) instruments of state support (e.g. avoid direct subsidies, but enhance access to financing via
Export promotion agency)
o
Quick wins , esp. in fighting corruption
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Thank you for attention!
Analytical center «New social and economic policy»
Kyiv, Irininskaya St, 5/24
Tel. +38044 3643272
E-mail: [email protected]
http://newsep.com.ua
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