Long-overdue economic reforms have meant continuous stagnation of Ukraine’s economy. For the economy to grow, market entry barriers need to be eliminated, and in the case of Ukraine, these hurdles are nearly impossible to overcome. As an example, to start a bakery, prospective businesses need to obtain 18 permits, and five or more agencies will be involved in the supervision. The overregulation is extensive, the government is incapable of effective control of the economic activity, making the need for an unwavering commitment to fostering prosperity-inducing policies ever more urgent.
President Volodymyr Zelensky has a great grasp of these underlying issues. At his request, we have been working on the Economic Freedom Act, which was presented during the latest National Reforms Council meeting on July 29. Zelensky immediately grabbed this opportunity to make Ukraine more economically free and was fervently supporting the act throughout the meeting. With our help, the president is bringing about a true economic revolution.
Let’s look at some facts. Currently, in Ukraine, there are 882 regulatory bodies, 77 areas of control (formally, but in practice – many more), 72,032 scheduled and 77,925 unscheduled inspections (for 2021), more than 50,000 regulatory acts and approximately 450 hours per year spent by businesses on administrative services, official reporting, going through inspections.
Small and medium enterprises make up over 70 percent of the Ukrainian economy. However, they are also the ones that are most affected by overregulation. It is equally important to persist with deoligarchization and to create and sustain favorable regulatory conditions for small- and medium-sized enterprises. If we don’t deregulate and do not reduce the administrative and control burden on businesses, Ukraine’s economic development will continue to stagnate and decline at 2 or 3 percent annually.
According to the Fraser Institute Economic Freedom Index, Ukraine is one of the most economically unfree economies in the world. Countries such as South Korea, Vietnam, Croatia, and Georgia that have taken the path of economic liberalization have seen dramatic increases in economic output. For example, in Georgia, more than 90 percent of licenses and permits were reduced from 909 overall to only 45 licenses and 52 permits; and 83 percent of all papers requested by government officials were liquidated. As a result, between 2003-2021, the real gross domestic product went up by 70.6 percent.
Since its launch, the Office of Simple Solutions & Results has been dedicated to making Ukraine a freer place, and economic freedom is the crucial part of that fight. To embed our ideas of limited intervention into the economy, transparency, rational minimization of the number of documents and procedural actions, and availability and accessibility of administrative services, we put together the Economic Freedom Act.
Endorsed by the President and other members of the National Reforms Council, the Economic Freedom Act bans the creation of new controlling agencies in the field of entrepreneurship, as well as the introduction of new permits, licensing and reporting, and guarantees the de-bureaucratization of business and government interaction.
The key pillars of the draft Economic Freedom Act which were presented to the National Reforms Council:
1. Unplanned business inspections in most cases should be undertaken only following a court decision. In the absence of such, they should be banned.
2. Business activity can only be suspended based on a relevant court decision. No business activity can be interrupted unless authorized by the court.
3. Liability and/or property insurance is a viable alternative to the government`s control of economic activity. If insurance contracts define the risks of liability and/or damage that may be subject to inspections, the insured businesses should be exempt from state supervision or control.
4. Government control is to be based on the application of an automated system of business risks, which determines the type of inspection, frequency, list and scope of issues to be inspected (therefore, no all-encompassing control). The body authorized to carry out government control, which has not implemented the said risk management system, will be deprived of the authority to carry out inspections.
5. Controlling bodies should stick to their exclusive field of competence – prohibition of inspection of one subject of regulation by different controlling bodies. Inspection by controlling bodies can be complex or consecutive – at the choice of the business entity.
6. Submission of documents for administrative services, official reporting and other communication between business and government should be translated into paperless and electronic format. It is not possible to apply for services or submit documents in electronic format – the government will not be able to require reporting and/or obtaining permits, licenses, etc.
7. To ensure deregulation, in some areas of government`s control over the activities of economic entities should be entrusted to self-regulatory organizations or independent third parties. That will maximize the separation of powers and more efficient functioning of state bodies.
8. Current and future Ukrainian governments should abstain from introducing new controlling bodies (inspections) and expansion of spheres of control of economic activity, and introduction of new permits, licensing or reporting.
Commitment to the principles of economic freedom (and relevant modern regulatory tools) will establish a qualitatively new standard of state-business relations. Ukraine will also go up in the Doing Business ranking. The revolutionary change of the existing business regulations will reduce business compliance and administrative burden costs, thereby making Ukraine business-friendly.
The Economic Freedom Act is a framework document, and it will be first sent to the Verkhovna Rada committees for discussions. However, I am hopeful that it will get the support it deserves, and encourage members of Parliament to endorse it. We are also working closely with Oleksii Kucher and the State Regulatory Agency on bringing about effective deregulations embedded in the Act. Also, in order to implement the provisions of the Act, a number of other legislative changes should be introduced in the dialogue between the government and businesses, which significantly liberalize the conditions for starting and running a business in Ukraine, as well as unleash the entrepreneurial potential of Ukrainians. We expect that the Act will turn Ukraine into a successful country similar to Singapore or Georgia that everyone looks up to.
Ukrainians have already waited too long, and we cannot afford to overwhelm our businesses any further. By giving them air to breathe, we will safeguard long-term economic prosperity.
Mikheil Saakashvili has been the chair of the executive committee of the National Reforms Council since May 7, 2020. He served as governor of Odesa Oblast from May 30, 2015, to Nov. 9, 2016. He was president of Georgia from Jan. 25, 2004, to Nov. 17, 2013.
