Economic freedom for Ukraine – New Eastern Europe

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Ukraine needs economic growth, because it provides the necessary resources for defence, social peace and reforms. State interference in the economy has been too strong and increased social obligations given the poor business climate have constrained business activity.

December 18, 2017 – Valerii Pekar –
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WORLD ECONOMIC FORUM/swiss-image.ch/Photo Jolanda Flubacher

Ukraine: The European Frontier – a blog curated by Valerii Pekar.

There are many reasons to suggest that the next year, despite the return of street protests, will be politically moderate for Ukraine. At the same time, the economy will be under pressure.

In general, Ukraine is doing well. In the fields of the army, diplomacy and domestic politics, he achieved undeniable successes. Russian aggression has been stopped, the army is modernizing and the world is supporting Ukraine in its struggle. Over the past four years, Ukraine has managed to avoid major social shocks, has taken in 1.8 million internally displaced people and has started to reform most state institutions, although only with varying success.

However, these achievements have not been accompanied by economic growth.

In 2014, the Ukrainian economy received a severe blow: the war, the occupation of Donbass, the annexation of Crimea and the loss of the traditional Russian market all contributed to the current crisis. And since then, the fragile Ukrainian economy has not recovered.

Economic growth is necessary because it provides the means for defence, social peace and reform. Poverty is the main cause of people’s discontent.

Unfortunately, Ukraine has had little economic success. Sluggish economic growth of around 2.5% after such a blow means it will take a whole generation to restore the wealth lost since 2013. But Ukraine has a bigger problem: prices are rising rapidly and inflation is above expectations. Low economic growth, high price inflation and high unemployment is the most deadly combination, as it leads to stagflation. That is why the National Bank of Ukraine recently raised the bank rate twice, sending a signal to the government, parliament and society that the country has a serious problem. The diagnosis is clear: State interference in the economy has been too strong and the increase in social obligations given the poor business climate has constrained business activity.

My travels across the country and my meetings with hundreds of local businessmen in different cities allow me to draw several conclusions.

The most important issue is business security. There are many law enforcement institutions that use their power to penetrate businesses, threaten to shut down their operations and, in fact, collect bribes. Recently, the government pushed through parliament a law that essentially limits the rights of state institutions to destroy corporations. While this is clearly a positive development, it is not enough. Businessmen know that the most brutal so-called “tax militia” was eliminated a year ago, but it is still actively collecting money from private companies. It’s time to finally dissolve the many “economic divisions” of law enforcement institutions and create a long-awaited single financial investigation service to deal with the biggest tax evaders, instead of the small ones. local shops, cafes and workshops.

Let’s go back to the need for rapid economic growth. Many countries experienced rapid economic breakthrough in just 15 years: the “Asian Tigers” in the 1970s, Israel in the 1980s, Eastern European countries in the 1990s. But to generate such growth, we need to improve the business climate and attract huge investments.

Ukraine ranks 166th in the Heritage Foundation’s Index of Economic Freedom and 76th in the Doing Business ranking. The big leap planned after the EuroMaidan was not achieved.

Ukrainian economists say that several solutions would generate rapid growth and make Ukraine an attractive economy.

First, we must accelerate transparent privatization: most of the 3,500 state-owned companies are not strategic and must be immediately sold through online auctions. This will help reduce political corruption and reduce the number of bureaucrats engaged in the management of state assets.

Secondly, we must implement land reform: the temporary moratorium on the sale of agricultural land, which was adopted many years ago for a short period of six months, is constantly extended to please the local “barons”, and meanwhile, the black market in land is flourishing. A transparent land market would attract investment and stimulate the banking system.

Third, the capital outflow tax instead of the inefficient corporate profit tax would significantly increase local investment resources (15-20 billion US dollars in five years, according to the Ukrainian Institute for the Future ) and, at the same time, would have an impact on reducing the underground economy and corruption. This is because the current corporate income tax allows for a high level of tax inspector discretion and the use of offshoring.

Fourth, we must implement decisive deregulation. According to the Better Regulation Delivery Office, 95% of regulatory acts are unclear as to what they regulate and why.

Finally, the reform of labor taxation is another necessity. The post-Soviet tax system is convenient for old-fashioned industries with huge assets and low wages, but at the same time it limits the development of the new economy, where highly paid creative labor is the main cost.

Other milestones will include the launch of a cumulative pension system, public-private partnership programs in infrastructure development, housing rental, energy independence, among other solutions. Respective research for the main sectors of the economy is currently being carried out by Ukrainian think tanks.

The Ukrainian political elite has already started to prepare for the upcoming elections and has chosen a strategy of high social obligations. Higher salaries for public sector employees, higher pensions and active social reforms are supposed to prove to voters that the authorities are taking care of them.

In the case of low economic growth and high inflation, this strategy is doomed to failure. Rapidly rising prices will quickly offset all wage and pension increases and plunge the poor into even deeper poverty. People can then become easy prey for populists, who will help turn many thousands of starving people against the authorities as the enemy.

Given the huge payments on foreign debts in the years to come, we see without a doubt that only accelerated economic growth is a way forward. Ukraine can grow between six, seven and eight percent a year, if not more. And the change must start now.

Valerii Pekar is a co-founder of the Nova Kraina civic platform, a lecturer at the Kyiv-Mohyla Business School and a former member of the National Reform Council. He runs a blog titled Ukraine: The European frontier.

economy, Ukraine, Ukrainian economy

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