Transcript Powerpoint - Council of Europe

The Bubble of Poor Governance:
Coping with Social Impacts of Recession
and Demographic Change in Ukraine
Local Government: Responses to Recession Across Europe
CDLR/LGI INTERNATIONAL CONFERENCE
Strasbourg, Council of Europe
11-12 October 2010
Impact of Crisis in Ukraine:
Bursting Bubble of Poor Governance
The way countries across the globe reacted to the economic crisis
was determined, to a critical extent, by their prior vulnerabilities
and constraints in their initial conditions:

availability of fiscal space for
mitigating fiscal measures?

existing commitments related to
exchange rate regimes and price
stability?

Ukraine’s key vulnerability: weaknesses in multi-level
governance accumulated before the crisis and depleted
capacity to design and implement effective policies
1
Growing problems before crisis:
 GDP addicted to steel prices;
 Fragile compact between levels
of government;
 Fragile social contract
between state and taxpayers;
 Corrosion of civil mobilisation;
 Rigidities in public
expenditures;
 Poor healthcare and
soc.protection = society aging
without living longer
 Collapsing pension system
Strong magnitude of economic
& social impact
2
Weakest link: policy making
Strongly procyclical result (not
“response”)
 Cuts in Expenditures + Expanded
Pensions
 Quasi-fiscal deficit in energy sector
 Massive administrative tax squeeze
 Reduced transparency of budgeting
 Local regulations failing
3
Open Questions:
 How sustainable is IMF’s current coverage of Ukraine’s unsustainable deficit
of policy-making capacity?
 Questionable prospect and added value of tilting the system any further to
sub-national levels
Weaknesses in multi-level governance accumulated prior to crisis: 1
 Inefficient regulation of country’s participation in international
trade and financial markets, resulting in dangerous imbalances
IMF (2008): GDP Growth and Steel Prices in Ukraine
Weaknesses in multi-level governance accumulated prior to crisis: 1
 Fragile national compact within the multi-level governance
system
― Ukraine spent the last decade in an explosive stalemate of
uncompleted intergovernmental reforms, launched in 2000
― A mismatch between financial and regulatory
responsibilities at all tiers, leaving governments at all levels
in a state of constant fiscal and institutional stress
― Initial reforms highly aleatory  there has never been
enough political consensus for further change;
― Repetitive declarations of plans for reforms did not
materialise, perpetuating mistrust
― Weak demand for decentralisation at SN level (e.g. Pf
Property Tax)
Weaknesses in multi-level governance accumulated prior to crisis: 1
 Fragile social contract between the government and its taxpayers
― Sector-based tax exemptions and priveleges
― Free economic zones
― Distorted VAT system
― Distorted system of simplified taxation
― Major loophole of insurance profit taxation
Weaknesses in multi-level governance accumulated prior to crisis: 1
 Corrosion in temporary civil mobilisation achieved in 2002-2004
Voter Turnout in Elections in Ukraine (1998-2010)
82.9%
76.2%
64.1%
[Elections 1998-1999]
Parliament
[Elections 2002-2004]
President
Source: Ukraine's Central Elections Committee (http://www.cvk.gov.ua/)
[Elections 2006-2010]
Average
Weaknesses in multi-level governance accumulated prior to crisis: 1
 Rigid inefficient regulation of public services...
― Healthcare: continued strong reliance on “Semashko
healthcare model” of centralised management and
administration leads to systemic inability to deliver effective
care and prevention of chronic and non-communicable
diseases;
― Social assistance ineffective because of poor targeting;
― Social services funded in ways which encourage inefficient
residential care and which “follow providers”;
― Fragmented responsibility for social policy;
― Lack of long-term perspective in budgeting to account for
demographic trends.
Weaknesses in multi-level governance accumulated prior to crisis: 1
 ... leads to dramatic deterioration in health outcomes...
― Life expectancy at birth in Ukraine is one of the lowest in
Europe;
― Ukraine is 17th in the world by mortality rate (16,4 на
1000);
― Ukraine is 7th in the world by mortality related to cardiovascular diseases (637 на 100 тис);
― Given low birth rates (5th rate in the world in the ranking of
lowest amount of children per one woman (1,22)), Ukraine
is currently 3d in the world and 1st in the region by the rate
of population decrease (in average, 0,76% per year). By
2025, the country’s population is forecasted to shrink by
20%, which would be the second biggest absolute reduction
in the region.
WB: Forecast of population decreases in the region between 2000-2025
Weaknesses in multi-level governance accumulated prior to crisis: 1
 ... which means that Ukraine is aging without living longer
While in Europe aging is the result of increasing longevity at
the background of largely stabilised fertility rates, in Ukraine
low birth rates are accompanied by increasing mortality and
falling life expectancy.
18.0
16.0
14.0
12.0
10.0
8.0
6.0
Birth Rate
4.0
Mortality Rate
2.0
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0.0
WB: Forecast of change in proportion of population aged 65+ by 2025
Changes in Ukraine's Age Pyramid
1959
2001
Weaknesses in multi-level governance accumulated prior to crisis: 1
 Growing imbalances in the Pension System:
― In pre-crisis years, this stress has been mostly caused with the inability
of the current pay-as-you-go (PAYG) system to ensure sustainable
financing of growing pension expenditures;
Forecasted change in the ratio of population aged 65+ to
young (15-64) and working population in Ukraine
160%
140%
120%
100%
80%
60%
40%
20%
Burden on the young
Burden on working population
2070
2065
2060
2055
2050
2045
2040
2035
2030
2025
2020
2015
2010
2005
0%
― Despite widely shared
understanding that
current pension insurance
system is not sustainable,
Ukraine was not able to
move a step closer
towards tangible reforms,
because it required
difficult changes in the
taxation policy and
unpopular decisions on
pension age
Magnitude of impact: one of the deepest recessions; highest
inflation in the world (following only Venezuela)...
Real GDP
CPI (annual average)
Projections
Projections
2008 2009 2010 2011 2008 2009 2010 2011
CIS +
5.5
Russia
5.6
Ukraine
2.1
Kazakhstan
3.2
Belarus
10
Azerbaijan
10.8
Turkmenistan 10.5
Mongolia
8.9
-6.6
-7.9
-15
1.2
0.2
9.3
4.1
-1.6
4 3.6
4 3.3
3.7 4.1
2.4 4.2
2.4 4.6
2.7 0.6
12 12.2
7.2 7.1
15.6 11.2
14.1 11.7
25.2 15.9
17.1 7.3
14.8
13
20.8 1.5
14.5 -2.7
26.8 6.3
7.2
7
9.2
7.3
7.3
4.7
5
7.3
6.1
5.7
8.9
6.6
6.2
3.5
5.4
5.3
Low Income CIS8.6
Uzbekistan
9
Georgia
2.3
Armenia
6.8
Tajikistan
7.9
Kyrgyz Rep. 8.4
Moldova
7.8
4.7
8.1
-4
-14
3.4
2.3
-6.5
4.5
8
2
1.8
4
4.6
2.5
15.8 6.2
12.7 14.1
10 1.7
9 3.4
20.4 6.5
24.5 6.8
12.7
0
6.8
9.2
4.9
6.8
7
8.4
7.7
6.3
9.4
5
5.2
8.3
7.6
5.7
3.9
7
4
3
5
5.3
3.6
2
… But the biggest pressure created by the crisis was on Ukraine’s
policy-making capacity, which turned out to be the economy’s
weakest link.
Billions of UAH
Procyclical “policy results”:
 expenditure cuts but growing pensions in view of elections
160
Real consolidated budget expenditures (2007-2010)
140
120
100
Transfers to
Pension Fund
80
Debt servicing
60
Primary
expenditures
40
20
0
Jan-Aug 2007
Jan-Aug 2008
Jan-Aug 2009
Jan-Aug 2010
2
… But the biggest pressure created by the crisis was on Ukraine’s
policy-making capacity, which turned out to be the economy’s
weakest link.
Procyclical “policy results”:
 expenditure cuts but growing pensions in view of elections
100%
Composition of consolidated expenditures (2006-2010)
90%
80%
70%
60%
Transfers to
Pension Fund
50%
Debt servicing
40%
Primary
expenditures
30%
20%
10%
0%
2006
2007
2008
2009
Jan-Aug 2010
2
… But the biggest pressure created by the crisis was on Ukraine’s
policy-making capacity, which turned out to be the economy’s
weakest link.
Procyclical “policy results”:
 funding growing deficits by building pro-cyclical, quasi-fiscal
debt
― VAT arrears: much more accumulated; previous arrears
restructured with T-bills (implying big discounts); no
systemic solution descpite committment to IMF.
― Quasi-fiscal operations in energy sector.
2
2
… But the biggest pressure created by the crisis was on Ukraine’s
policy-making capacity, which turned out to be the economy’s
weakest link.
Procyclical “policy results”:
 funding growing deficits by building pro-cyclical, quasi-fiscal
debt
― VAT arrears: much more accumulated; previous arrears
restructured with T-bills (implying big discounts); no
systemic solution descpite committment to IMF.
― Quasi-fiscal operations in energy sector.60.0%
― Administrative tax squeeze.
40.0%
― Funding current expenditures with
funds earmarekd to other purposes
20.0%
EPT
0.0%
-20.0%
-40.0%
Jan
Feb
Mar
Apr
May
Jun
Jul
… But the biggest pressure created by the crisis was on Ukraine’s
policy-making capacity, which turned out to be the economy’s
weakest link.
Procyclical “policy results”:

continued expenditure rigidities; (no change so far despite
commitment to IMF)

continued weakness in public communications (despite explicit
advice from WB that these are most important in post-crisis
reforms)

failure of local price regulation for local housing and utility
services
2
Open questions:

How sustainable is IMF’s current coverage of Ukraine’s
unsustainable “deficit” of policy-making capacity?

Questionable prospect and added value of “tilting” the system
any further to sub-national levels?
3