Kyiv, September 23, 2010, — Today the World Bank presented the new Country Economic Memorandum (CEM) entitled “Strategic Choices to Accelerate and Sustain Growth in Ukraine”.
This CEM undertakes a comprehensive assessment of Ukraine’s economic growth experience over the past decade and examines the growth prospects moving forward.
The report argues that growth between 2000 and mid 2008 was mainly driven by external factors, such as unprecedented gains in terms of trade and massive capital inflows. These factors are unlikely to support growth in the same order of magnitude following the crisis.
Moreover, it highlights how rapid growth masked some of the underlying economic vulnerabilities such as weak financial sector supervision and risk management, structural fiscal imbalances and a poor investment climate. The report traces the emergence of large structural fiscal deficits since 2004 resulting from significant social spending hikes, and highlights the significant fiscal pressures ahead. Moreover, while rates on direct taxes are high, public infrastructure investments have been badly neglected, making the current fiscal model unsustainable. The report shows how a poor investment climate, low competitive pressures, limited innovation and slow structural transformation of the economy are all interlinked and perpetuate Ukraine’s dependence on a few commodity based exports, making it particularly vulnerable to external shocks. But, to achieve real impact, the report argues, fiscal and investment climate reforms will require complementary public sector reforms that reduce red tape and corruption.
“Economic recovery and sustained growth will have to come from higher productivity and this in turn will require Ukraine to embrace fiscal and structural reforms that have been delayed during the last decade”, said Pablo Saavedra, Senior Economist and Country Sector Coordinator for Ukraine, Belarus and Moldova and lead author of the report. “The objective should be to reduce the footprint of the state and let the private sector thrive and drive growth based on the pressures of market competition rather than political connections.”
The analysis in the CEM points to a large upside from a comprehensive reform effort. Indeed, Ukraine has vast opportunities to benefit from the next phase of globalization given its enviable geographic location, abundant natural resources, and educated labor force.
“Following the crisis and in the new global economic context, Ukraine finds itself at a crossroads. The decisions that Ukraine’s leaders take now and over the next three years could make the difference between a low growth, more of the same scenario, and a scenario of rapid modernization, turning Ukraine into a powerhouse in Eastern Europe” said Martin Raiser, World Bank Country Director for Ukraine, Belarus and Moldova.
The report points to three key reform areas:
(i) Fiscal reforms to secure macro stability, attract back investors, and clear the backlog of VAT refund arrears which is delaying export recovery. The report also calls for reforms and measures to create fiscal space for the needed public infrastructure to support private sector growth and improve service delivery;
(ii) Improvements in the investment climate to lift barriers to entry and exit of business, improve competition, and foster export diversification and sophistication, and
(iii) Public sector reform to radically change the way the public sector interacts with business and citizens by improving the judicial system, reducing red tape, cutting down bureaucracy and rationalizing the web of overlapping regulatory agencies, as well as tackling administrative capture and corruption.
The report also argues that in the short term banking sector rehabilitation and the strengthening of financial sector regulation, supervision and transparency are key to attract resources and resume intermediation to the real sector of the economy. And it shows how these reform areas need to be tackled in parallel since their impact depends on simultaneous progress in all areas. Without fiscal reforms and macroeconomic stability, investors will remain risk averse. Without improvements in the investment climate, banks will struggle to find viable lending opportunities. And without a decisive reduction in red tape and corruption, structural reforms risk remaining on paper and the credibility and sustainability of the reform effort would be undermined.
The CEM is one of the World Bank’s core analytical reports on growth and development prospects at the country level, usually launched in member countries every 3 to 4 years.