What Ukraine needs most now? Evidence from Slovakia Reforms

Ivan Mikloš (former Minister of Finance and deputy Prime Minister of the Slovak Republic)

I visited Ukraine for the first time in March, only a few weeks after the tragic and heroic events around Maydan. Since that time I have begun to intensively think about how to help Ukraine with necessary reforms. I spent almost all of my professional life preparing and implementing economic reforms in my country, Slovakia. The main aim was to change my country from backwardness and stagnation into a modern, competitive European state. We enjoyed mixed success, but in general we can say today that Slovakia has produced a successful transition. We are not only in the EU but also in the Eurozone (unlike neighbouring Visegrad countries, Poland, Czech Republic and Hungary). We have recorded the highest cumulative economic growth among all EU countries from the breakdown of the communism until now and we have been one of the world’s most successful economies in that period. At the time of independence in 1993, Slovakia had only 62% of the Czech Republic’s GDP per capita. Just this year, we caught up with our westerly neighbour on this metric. Twenty-five years ago Slovakia produced antiquated Soviet tanks and another heavy military equipment but not one car. Today we are the number one producer of cars in the whole world, per capita. The most important reason for that success is reforms. Let me illustrate this by comparing convergence success of the Visegrad countries from 2004 until 2008. Over those four years, GDP per capita in PPP in comparison with the EU average improved in Hungary by 1%, Czech Republic by 3%, Poland by 5% and Slovakia by 16%. These were the first four years of EU membership for all of these countries, therefore the big difference among their convergence progress has to have had different reasons. This reason is reforms.

Kyiv People’s Republic: A threat to Ukraine

By the Editorial Board of VoxUkraine

It has been six months since the Maidan movements toppled President Yanukovych. Yet, there has been little progress in reforming the country. In this post, we summarize our obsevartions and dicuss how Ukraine should move forward.

Observation 1. There is a lack of sense of urgency among players in Kyiv.

Ukraine is in danger. There have been no radical reforms since the departure of Yanukovich and after a brief pause the corrupt reactionaries are back and “business as usual” is at full swing. High expectations of local businesses for positive changes are waning quickly. The government, the president, and the new and old political forces are talking a lot about reforms, but instead are reading themselves for the new elections and have put serious reforms on hold until the new distribution of power becomes clear. There is a profound lack of sense of urgency among the players in Kyiv. This can prove to be a death sentence for the sovereignty of Ukraine. 

The situation is very dramatic. The economy has entered recession and the projected GDP growth is negative, systemic corruption has not been touched, the risk of gas shortage in the winter is growing, foreign exchange market remains turbulent endangering already heavily hit banking, and there is no feasible lasting solution in sight for the war in the East. The capacity of the executive power continues to be extremely limited, with incompetent bureaucrats populating most of the offices, and their incentives have not been aligned with that of the public. The public is increasingly disillusioned with the political will of new government and the president to reform the country, as well as with some of the new wave activists.

How Ukraine has lost the policy making capacity

By Anton Shevchenko (Ukraine)

Summary (by the editorial board of VoxUkraine)

Recently, the parliament passed a law that taxes several industries. The law attracted a lot of attention because of its controversy: the prime minister threatened to resign, and media speculated about a conflict within the government. The public perceives the law as a success for the prime minister and, more generally, the government in its fight with the oligarchs.   

This post argues that the law is ill-advised and counterproductive. The law taxes the very industires that have been the engine of the economic growth in Ukraine in the recent years and thus harms the ability of the country to resist the looming economic crisis. Furthermore, the law makes evident the time-inconsistency problem of the Ukrainian government policy, reducing the capacity of the government to influence economy and investors. Finally, it taxes industries not the oligarchs: jobs will be destroyed, investment in the infrastructure discountinued, the tax revenues will dry up, while the oligarchs will move away from developing healthy industries towards rent-seeking activities within the state.  

This law is an example of a myopic and non-systemic approach to reforms in the times of economic and political crisis, which may do more harm than good. 

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Imagine a country with a projected 6 to 10% GPD decline. Economists play football with arguments (here and here) discussing whether or not the country needs state-funded stimulus. And here the arbiter comes: the government files a bill with a proposal to tax five industries which were the engines of economic growth in last couple years. Yes, you are in Ukraine.

So, the Ukrainian government filed a bill to parliament in the end of July, with an aim to raise short-term tax revenues because economy slowdown and inability to reduce budget expenses were increasing state’s deficit. In the proposal, the government suggested to increase mineral extraction tax for natural gas to 70% (from 28%), to prolong indirect duties on grain export of about 20% (through non-refund of export VAT) for a year and cancel certain subsidies for agriculture (on average 5-7% of revenues) thereafter. Construction industry had to lose the ability to postpone income tax payments until real estate is completed, hotel industry was due to forget about its income tax break until 2020 (granted as stimulus before EURO 2012), green electricity projects were also losing their ten-years income tax break introduced just four years ago. All suggested tax policy changes were due to come into effect either on 1 October 2014 or on 1 January 2015.

Economic activity brief: Agriculture

Oleksandr Zholud (Kyiv, Ukraine)

The agricultural potential of Ukraine has been recognized for ages. Indeed, Ukraine has all key ingredients to be successful in this area: fertile land, plenty of water, and mild climate. Many believe that agribusiness can be the next best thing in Ukraine, especially when Ukraine ratifies the association agreement with the EU. However, the recent track record of the agricultural sector in Ukraine is hardly impressive. For example,  productivity in the sector has been chronically low. This post briefly reviews challenges and prospects of the growth in Ukraine’s agricultural sector.

How can we ourselves improve the economic situation in Ukraine?

Tom Coupe (Kyiv School of Economics)

Whenever there is a new government, academics, experts and NGOs start writing reports on what the new government and the individual ministers should do to improve the economic situation in Ukraine and finally realize the Ukrainian economy’s full potential. This advice is typically well meant and to the point, however, it often does not reach or fails to convince the people to whom it is addressed. That, at least, is the impression one gets if one compares the reports that have been addressed to previous Ukrainian governments and what has been realized by these government.

Hopefully this new government will be more receptive to some of the ideas proposed but in spirit with the Maidan movement, it might be a good idea to not just wait for politicians to do something, but instead also let the men-and-women-in-the-street take the initiative. Here are some ideas on how non-politicians can improve the Ukrainian economy.

Does Ukraine need a macroeconomic stimulus now?

By Dmytro Sologub (Raiffeisen Bank Aval, Kyiv, Ukraine)

First of all, I would say that for me as a person deeply involved into the analysis (and sometimes policymaking) of Ukraine's economy and financial sector for more than 10 years now, it was very interesting to get an outside view on the situation, provided by Yuriy Gorodnichenko. And I have to admit that indeed at the moment there is no much discussion on the stimulation of the economy going on. The policymakers and analysts are mostly focusing on short-term stabilization measures, like revising budget revenues and expenditures, improving Naftogas finances, stress testing the banking system, etc. At the same time, I would like to present several arguments why I see the massive fiscal and monetary stimulus problematic under current circumstances.

Macroeconomic stimulus for Ukraine

By Yuriy Gorodnichenko (UC Berkeley)

After years of mismanagement and looting, Ukraine faces a number of economic challenges. The situation is so critical that weak economic performance in the next few years could undermine the very independence of the country. Just yesterday, President Poroshenko signed a degree setting up the National Council for Reforms to design and coordinate reforms in Ukraine. While the focus on what should be done to transform the country in the medium and long run is understandable, one should not ignore the current difficulties.

Indeed, the broad consensus is that Ukraine’s economy is likely to experience a deep contraction in 2014 (e.g., the IMF projects a more than six percent decline in real GDP). The unemployment rate is quickly rising. Industrial production has been in decline for over two years. In the first quarter of 2014, investment fell by 25 percent. The fiscal deficit might exceed 10 percent of GDP (this includes quasi-government sector) in 2014. After the hryvnya—the national currency—depreciated by more than 50 percent, inflation accelerated and the National Bank of Ukraine predicts that the inflation rate in 2014 could hit 19 percent.

 

Despite the dismal state of the economy, there has been no real discussion about macroeconomic stabilization. This silence contrasts sharply with how much policy in the U.S. and other countries was focused on countercyclical policies during the Great Recession. Furthermore, instead of fighting the recession, the government in Ukraine appears to be concerned with balancing its budget by cutting spending and raising revenue while the central bank has increased the policy interest rate. So, both fiscal and monetary policies in Ukraine currently appear to be contractionary.

We know that recessions are bad. Deep, prolonged recessions like the one Ukraine is having right now are very, very bad (e.g., they can lead to persistent long-term unemployment). Why would anyone want to make a deep, prolonged recession even deeper and longer by not trying to stimulate the economy? I’ve heard several arguments.

Economic Prospects of Ukraine

By Yuriy Gorodnichenko (UC Berkeley)

Ukraine is living through most trying times: Maidan protests, snipers killing dozens of unarmed protesters, the fall of Viktor Yanukovych’s regime, near-default of the government, Russian annexation of Crimea, and Russian-sponsored separatist mutiny in Ukraine’s East. With the victory of the February revolution, the new government, and the new elected president Petro Poroshenko, Ukraine has solved some of its political problems but it continues to face a number of challenges on its path to building a successful democratic country.

The backbone of this success has to be good economic performance, and so a crucial question is whether Ukraine’s economy will rebound from recent setbacks. A month ago, the International Monetary Fund (IMF) gave a US$17 billion emergency loan which also unlocked loans and aid (in total close to what the IMF loaned) from other donors—individual countries (e.g. U.S., EU) and multinational agencies (e.g. EBRD). These resources can backstop Ukraine from collapsing due to short-term funding problems such as decreased fiscal revenues, depleted foreign reserves, and an economic recession. However, this support will be wasted unless Ukraine experiences robust economic growth in the medium run. In this post, I outline the key forces that, I believe, will shape the economic future of Ukraine over the course of the next ten or so years as well as discuss potential risks that can stall Ukraine’s development.

A proposal for economic emergency measures in Ukraine.

by Yuriy Gorodnichenko (UC Berkeley)

This proposal is a few weeks old but it is highly relevant even now. Larry Summers makes a similar point.