Transcript Improving Ukraine’s Investment Climate Dr. Edilberto Segura SigmaBleyzer, The Bleyzer Foundation

Improving Ukraine’s
Investment Climate
Dr. Edilberto Segura
SigmaBleyzer, The Bleyzer Foundation
January 2008
1v2
W H
E R
E
O P P O
R T U
N I T I E
S
E
M
E
R
G
E
Economic Performance
 Between 2001 and 2006, few countries showed the following combination of
economic achievements:
•
•
•
•
•
•
•
High average rate of economic growth
Low fiscal deficits
Moderate inflation rates of about 10-12% pa
Good external fundamentals (with large surpluses in the current account)
Fairly stable foreign exchange rate
High international reserves in excess of three months of imports
Very low ratio of external public debt to GDP
 However, 2007 already showed some signals of economic, disequilibrium both
external (with a 3.0% CA deficit) and internal (with inflation at 16.6%).
Real GDP Growth
Fiscal Balance (% GDP)
Consumer Inflation (eop)
Exchange Rate (Hr/$, eop)
Current Account ($bn)
(as % of GDP)
International Reserves ($bn)
Foreign Public Debt (% GDP)
2001
9.2%
-0.3%
6.1%
5.30
1.4
3.7%
3.1
26.3%
2002
5.2%
0.7%
-0.6%
5.33
3.2
7.5%
4.4
24.1%
2003
9.6%
-0.2%
8.2%
5.33
2.9
5.8%
6.9
21.3%
2004
12.1%
-3.2%
12.3%
5.31
6.8
10.6%
9.5
18.7%
2005
2.7%
-1.8%
10.3%
5.05
2.5
2.9%
19.4
13.4%
2006
7.3%
-0.7%
11.6%
5.05
-1.6
-1.5%
22.3
11.9%
2007(e)
7.3%
-1.8%
16.6%
5.05
-4.0
-3.0%
32.5
10.0%
Source: State Statistics Committee of Ukraine, National Bank of Ukraine, Ministry of Finance of Ukraine, The Bleyzer Foundation
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2008(f)
5.5%
-2.0%
13-15%
5.05
-10.0
-5.5%
34.0
9.0%
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Medium Term Outlook
 Past economic growth was supported by increases in private consumption (which
grew in 2004-2007 by around 16%), fixed investments (surging on average by
around 17% in 2004-2007) and export growth in 2004, 2007.
 The increases in private consumption were associated with major increases in
pension payments and public wages approved by the government, as well as
continuing credit boom (surging in 2004-2007 by almost 60% p.a.).
 Exports benefited from high metal and chemical prices and reasonable external
conditions for other commodities (i.e., machinery and transport equipment).
 Unfortunately, consumption and export as a sources of growth are unlikely to be
maintained in the future:
• Consumption increases are already been reflected in high inflation.
• Export prices for metals are unlikely to increase in the future.
 Therefore, over the medium term the country will not be able to rely on increased
private consumption and exports as the main engines of growth.
 In order to achieve strong and sustainable economic growth in the long-run the
country will require new investments and technology.
 This will require major improvements in the investment climate.
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Break-through to knowledge based economy
 To ensure sustainability of the economic growth, Ukraine’s top
priorities for 2008-2009 should include comprehensive efforts to
improve country’s investment climate, stimulate investments in
knowledge and innovations, other structural changes in order to boost
productivity growth;
 Based on extensive theoretical and empirical research, there is a broad
recognition among economists and policy-makers of the positive impact
of human capital, R&D, technological progress and innovation on
productivity and economic growth;
 In order to advance towards the knowledge-based economy, Ukraine
needs to invest in high technology sectors and promote knowledge
diffusion across economy. Investments in the knowledge-based economy
must be channelled into: (i) highly-skilled human capital (ii) capacity
and quality of education systems (education spending and life-long
learning), (iii) purchase of new capital equipment that spread innovative
technologies and managerial know-how.
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Ukraine in Global Competitiveness Index 2007-2008
Source: World Competitiveness Report 2007-2008
Global Competitiveness index 2007-2008
Basic requirements
Country
Efficiency enhancers
4th pillar:
5th pillar:
3d
pillar:
Overall
1st pillar: 2nd pillar:
Health and
Higher
Macroeconomic
A
B
Institutions Infrastructure
primary
education and
stability
education
training
6th pillar:
Goods
markets
efficiency
Innovation factors
7th pillar: 8th pillar:
9th pillar:
11th pillar:
Labor
Financial
10th pillar:
12th pillar:
Technological
Business
C
markets
markets
Market size
Innovation
readiness
sophistication
efficiency sophistication
China
34
44
77
52
7
61
45
78
58
55
118
73
2
50
57
38
India
48
74
48
67
108
101
31
55
36
96
37
62
3
26
26
28
Turkey
53
63
55
59
83
77
51
60
43
126
61
53
18
48
41
53
Russia
58
68
116
65
37
60
48
45
84
33
109
72
9
77
88
57
Kazakhstan
61
66
80
71
25
94
58
57
63
15
80
77
56
84
85
75
Uzbekistan
62
69
56
66
103
59
76
49
66
43
115
84
70
51
59
42
Azerbaijan
66
65
83
60
23
103
84
89
95
46
91
83
71
68
80
54
Brazil
72
101
104
78
126
84
55
64
97
104
73
55
10
41
39
44
Ukraine
73
90
115
77
82
74
66
53
101
65
85
93
26
75
81
65
Romania
74
88
94
100
84
52
62
54
74
85
78
59
43
73
73
76
Bulgaria
79
76
109
84
47
56
72
66
90
73
74
65
61
91
92
88
Armenia
93
91
96
87
57
99
101
95
104
40
110
104
111
103
115
94
Tajikistan
117
114
88
109
127
104
124
106
119
72
124
123
118
108
121
97
According to the latest World Competitiveness Report, weak technological readiness of
Ukraine continues to exact a visible toll on country’s competitive position.
Hence, encouraging foreign investments into the high technology sectors is key to
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maintain and advance country’s global competitive advantages.
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Improving the Country’s Business Environment:
The government’s program should include measures in the following
areas:
1. Public and Corporate Governance
2. Macroeconomic Stability
3. Stable and Predictable Legal Environment
4. Liberalization and Deregulation of Business Activities
5. Removal of International Capital & Foreign Trade Restrictions
6. Facilitation of Business Financing by the Financial Sector
7. Reduce Corruption
8. Country image
9. Political risks
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Future Reform Agenda for Ukraine
1. Implement a fundamental public administration reform:
The weaknesses of Ukraine’s public administration – including cumbersome
decision-making, bureaucracy, unclear and overlapping responsibilities -- are
major constraints in the implementation of economic reforms. The country can
design policies, but fails in implementation. Without public administration reform,
it is likely that needed economic reforms will be implemented very slowly or will
be reversed quickly.
A reform of public administration should include the following:
─ clearly define the Objectives/Role of the Government limiting it to “public”
goods and support - not substitution – of the private sector;
─ Undertake a comprehensive “audit” of all government programs, with a view
to transfer some of them to local governments, sub-contract others to the
private sector and eliminate unnecessary/overlapping activities.
─ develop the concept of well-defined “Programs and Projects” for all
government activities (this will help to improve administrative efficiency,
deal with corruption and also bring equilibrium to the fiscal budget)
─ Improve the efficiency in retained “core” government activities and local
governments, increasing public transparency and access to government
information.
─ Carry out a civil service reform introducing effective "Incentives" and
"Control“ Systems
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….Future Reform Agenda for Ukraine
2. Improve macroeconomic Stability by strengthening fiscal policies
(improving tax administration, reforming the pension system,
decentralizing financing), monetary policies (developing techniques for
inflation targeting –open market operations, forecasting models) and
foreign exchange rate policies (abandoning the exchange rate anchor)
3. Improve the legal environment by:
• Improving the practice of “public” consideration of any legislative act
to be adopted, including their correspondence with existing legislation.
• Ensure the independence of the Judiciary by further improvement of
the financing of courts.
• Improve court administration and enforcement procedures.
• Deal expeditiously with issues of illegal corporate raidering.
4. Accelerate further quick deregulation and liberalization of business
activities (permits, licenses).
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….Future Reform Agenda for Ukraine
5. Develop sound Corporate Governance practices by enacting key
pending legislation (e.g., the Joint Stock Companies law), abolishing the
Commercial Code while amending the Civil Code, developing corporate
governance codes, and accelerating the adjustment of Ukrainian
accounting standards to international accounting standards.
6. Liberalize trade, join the WTO, sign free trade agreements with the
EU, CIS, and other countries, and simplify trade clearance procedures.
7. Strengthen the Financial Sector, particularly by enforcing banking
regulations and supervision.
8. Implement a prevention program to deal with Corruption
9. Improve the country’s image by strengthening an Investment
Promotion Agency and implement specific activities for large investors
(identify major projects, carry out targeted promotional campaigns,
identify niches/sectors) and for small/medium firms (access to bank
credit, better information on laws, etc).
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Ukraine is an Attractive Country for Investment
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Highly educated labor force (almost 60% university enrolment)
Low wages
Border on the EU, with increasing trade potential
Large domestic market (large population with growing purchasing power)
Great agricultural potential
Industrial and high-tech potential
Likely prolonged period of significant economic growth
Inefficiently run companies provide significant opportunity for value creation
through improved operations, marketing, finance, customer and quality focus –
bottom line growth
 Growing interest in the country by multinationals and other investors
 Ukraine is the only post-Soviet country (in addition to the Baltic states) that is
rated by Freedom House as a free country
 But there is strong competition to attract FDIs and Ukraine has a below
average investment climate, as shown in the following country ratings of
investment climates.
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1. Public and Corporate Governance
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CORPORATE GOVERNANCE
Accelerate the adoption of the Joint
Stock Company Law
Speed up the adjustment of
Ukrainian accounting standards to
international accounting standards.
Remove inconsistencies between the
Civil and the Commercial Codes by
eliminating the Commercial Code
and passing some of its provisions to
the Civil Code.
Develop corporate governance
codes.
PUBLIC GOVERNANCE
Redefine the Government's Role towards Supporting Private Sector Activities
Undertake a comprehensive “audit” of all government programs, with a view to transfer some
of them to local governments, sub-contract others and eliminate unnecessary/overlapping
activities.
Improve efficiency in retained “core” government activities and local governments, increasing
public transparency and access to government information.
Carry out civil service reform introducing effective "Incentives" and "Control“ systems
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2. Macroeconomic Stability
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Pursue sustainable fiscal budget policies, including improvements in tax
administration and expenditure controls, reform of the pension system, and
decentralization of financing/execution of some government activities.
Pave the way for adopting monetary policy based on inflation targeting.
Strike a reasonable balance between social, political and economic dimensions of
policy decisions.
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3. Stability and Predictability of the Legal
Environment
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Improve the practice of thorough consideration of any legislative act to be adopted,
including their correspondence with existing legislation.
Ensure the independence of the Judiciary by further improvement of the financing
of courts.
Improve court administration and enforcement procedures.
Drastically enhance enforcement of rights and contracts.
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4. Liberalization and Deregulation of Business
Activities
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Secure effective implementation of the second phase of the quick deregulation strategy.
Increase stability of existing regulations by avoiding frequent changes in legislation
concerning business activity.
Improve coordination between central and local government bodies on regulatory policy
issues by avoiding conflict of interests between different levels of executive power and
making clear distinctions in the area of their responsibilities.
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5. Liberalization of Foreign Trade & Capital
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Ensure entry into the WTO as soon as possible.
Promote signing free trade agreements with the EU, CIS and other countries.
Continue streamlining customs procedures and formalities to ensure prompt consideration
and to avoid opportunities for rent seeking behavior.
Soften export restrictions and eliminate import nontariff restrictions.
Ease the system of certification and standardization to acknowledge international
standards.
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6. Financial Sector Development
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Better enforce banking regulations and supervision
Ensure equal "playing conditions" for domestic and foreign banks.
Provide mechanisms to deal with risky unsecured debts issued by commercial banks
Encourage stock market transactions to be made on the organized market.
Stimulate development of nonbanking financial sector by introducing a framework law
on nonbanking financial institutions.
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7. Corruption Level
80
80
60
60
40
40
20
20
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•
•
•
Estonia
Estonia
Slovenia
Slovenia
Hungary
Hungary
Slovakia
Slovakia
Czech Rep
Rep
Czech
Poland
Poland
Bulgaria
Bulgaria
Croatia
Croatia
Romania
Romania
Bosnia
Bosnia
Macedonia
Macedonia
Ukraine
Ukraine
Moldova
Moldova
Albania
Albania
Russia
Russia
Kazakhstan
Kazakhstan
00
Implement a corruption prevention program, including public administration reform to
improve transparency of decision making process and procurement procedures.
Reduce the ambiguity and discretion of government regulations and raise accountability
of the public servants for their decisions by introduction of e-governance resources.
Strengthen the capacities of the internal audit and make it fully accountable for public.
Accelerate the creation of independent anticorruption agency.
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8. Country Image
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•
Strengthening an Investment Promotion Agency and implement specific activities for large
investors (identify major projects, carry out targeted promotional campaigns, identify
niches/sectors) and for small firms (access to bank credit, better information on laws, etc).
Resolve outstanding investment disputes with foreign investors; ensure fair treatment of
foreign investors in courts.
Engage the country's embassies and other missions to disseminate up to date information on
Ukraine and its business opportunities.
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9. Political Risks
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Take measures to eliminate power abuses at different levels of government.
Accelerate Public Administration Reform.
Ensure predictability and public consensus on political reforms in the country.
Ensure political stability by developing a long – term strategy on establishing the effective
balance of powers and sustainable civil society.
Achieve balanced distribution of gains from economic and structural reforms. Avoid
disproportionate allocation of economic and social hardships to selected groups of population.
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Overall Investment Drivers – Country Ratings
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The Role of Techno Parks
 Poorly designed Industrial and Technology Parks have failed in many countries,
including the Free Economic Zones of Ukraine.
 The weaknesses in Ukraine included:
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Patchy legal framework, with contradictory regulations, which frequently resulted in tax evasion and
abuses of tax and customs privileges.
Ad hoc incentives and tax privileges led to distortions and rent-seeking behavior.
Week infrastructure and technology support.
Lack of seed capital for start-up companies.
Poor management and administration of the parks, with overlapping responsibilities and many cases
of corruption.
 As a result, these initiatives were abandoned in Ukraine.
 Nevertheless, required improvements in Ukraine’s overall country’s investment
climate will take time, even if pursued energetically.
 International experience shows that prudent administration of Industrial and Techno
Parks helps to trigger country-wide liberalization of business environment and
promote technological development.
 Therefore, in the meantime, the government could use well-designed Industrial and
Technology Parks as pilots to accelerate investments and technology innovation. 21
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High Potential For
Knowledge Economy in Ukraine
Ukraine: Selected Technology Indicators
Index
Value/Rank
Source
Global Innovation Index 2007 (rank)
75 out of 106
INSEAD
Overall Score on Technology Index 2004 (rank)
85 out of 104
Innovation Sub Index (rank)
39 out of 104
World Economic Forum
Information and Communication Technology Sub Index (rank) 76 out of 104
Networked Readiness Index 2007 (rank)
75 out of 122
ICT Diffusion Index 2005 (rank)
81 out of 180
United Nations Conference
*
access sub index (value/percentile rank ) 0.543 / 57.5
on Trade and Development
connectivity sub index (value/percentile rank) 0.141 / 55.3
Human development Index 2004 (rank)
77 out of 177
United Nations
Education Sub Index (value)
0.94 (max 0.99)
Estimated trade losses due to copyright piracy 2006
USD million
320
Intelectual Property Alliance
Rank 10 out of 61
*
percentage of surveyed countries performing worse than Ukraine
 Despite obvious technological bottlenecks, Ukraine possesses key resources that,
under adequate management, can trigger successful development of technology and
innovations:
•
•
•
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Highly educated and low cost labor force;
High enrollment rates in universities and exceptionally strong educational and research potential in
engineering, cybernetics, programming and mathematics;
Established tradition of scientific and applied industrial research;
Developed network of research and educational facilities.
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Policies to Develop Technology Parks in Ukraine
 By Law, the government established 16 Technology Parks in various
Oblasts.
 But not all are operative, and most face weaknesses that undermine their
growth, including poor infrastructure, poor property rights and lack of
investments and financing.
 To seriously developed Technology Parks, the Government should:
• Cooperate with the private sector to develop a national vision and strategy on
science and technology.
• Entrust the management of these parks to a partnership between private
companies and the government
• Develop “stable” regulations and tax treatments.
• Limit Government support to the needed initial infrastructure.
• Strengthen and simplify customs procedures
• Encourage knowledge transfers through industrial clusters
• Facilitate start ups of innovation companies
• Heavily invest into the human capital
• Liberalize the telecommunications industry
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