Whether Ukraine’s reform glass is half-full or half-empty is a recurring debate. The transformation and economic stabilization that has taken place since 2014—the half-full part — is impressive, seen in the context of Ukraine’s history and the immensely challenging conditions during 2014 and 2015. But it is equally true that progress is frustratingly slow and has met with much resistance, and that crucial sectors and institutions remain unreformed.
The scale of the remaining reforms — the half-empty part — required to bring Ukraine in line with other countries in Central and Eastern Europe is daunting. Complacency during much of Ukraine’s history since independence has left many old institutions and practices intact. Not only does this mean that the list of things to do is long. It also means that the country has adapted to a certain way of doing things. Breaking up established norms and structures will meet with resistance and will require serious political will.
But the payoff from successfully reforming Ukraine’s economic institutions could be enormous. Strengthening the judiciary and the rule of law, protecting property rights, eliminating corrupt practices, breaking up sectoral monopolies, opening up markets, and increasing the effectiveness and efficiency of the public sector would accelerate economic growth in Ukraine. Growth is needed for Ukrainian incomes to converge with those in Central and Eastern Europe.
That Ukraine has fallen behind in terms of economic development during the past decades is well-known. In 1990, Poland and Ukraine had similar income levels. Poland’s per capita income has since grown to more than 85 percent of the European average. In sharp contrast, with incomes at around 25 percent of the European average, Ukraine has made little or no progress in catching up with other European countries during the last three decades.
Farmers plow their fields on April 17, 2018 in Kyiv Oblast. (Oleg Petrasiuk)
So what is the problem? Why has Ukraine not emulated the success stories of neighboring countries? The answer is that labor, land and machinery are not being used in an efficient way. For the same amount of input, Ukrainian firms produce only one-tenth of the level of output of the most productive countries in Europe. The challenge is to improve productivity — in other words, to increase the value of what Ukrainian workers produce. This requires investment.
Much-needed investment is not materializing because of concerns that property rights are not protected, and that businesses will not be treated evenly and fairly. Surveys of potential investors confirm this picture. The most common answers to the question of what is holding back investments are: widespread corruption, lack of trust in the judiciary, and monopolization and capture by oligarchs. Before making the long-term investments that the Ukrainian economy desperately needs, investors are asking that outdated and inefficient institutions, plagued by corruption, be upgraded to good international practice.
A cross-country analysis by International Monetary Fund staff confirms that the strength of key institutions, such as an independent and trusted judiciary, is closely linked with higher productivity and income.
Applying this analysis to Ukraine, we find that, by first and foremost strengthening the legal system — but also by deregulating product markets, facilitating international trade, strengthening financial markets and opening up the agricultural land market — Ukraine could almost double its economic growth rate to 7 percent annually. In doing so, income levels in Ukraine would rise and finally begin to catch up with those in other Central and Eastern European countries. Future generations of Ukrainians would enjoy higher standards of living, comparable to those in neighboring countries. But achieving this requires a period of sustained reforms. It is high time that Ukraine presses ahead with these.
Gösta Ljungman is the International Monetary Fund resident representative in Ukraine.
