Ukraine’s untapped private sector is a hidden resource that could drive the country’s long-term economic growth and create jobs, says a recent World Bank Group report titled “Opportunities and Challenges for Private Sector Development in Ukraine.”
“The private sector has all it takes to realize Ukraine’s substantial growth potential,” says Marcin Piatkowski, senior economist at the World Bank and one of the report’s authors.
But to achieve this, Ukraine needs to open up markets more for businesses and the economy to thrive. Equally important, it must uproot deeply-seeded corruption and counter state capture by large industrial-financial groups.
Unfortunately, it is far from doing this.
However, the report notes that Ukraine has made substantial efforts to improve its business regulations. Thanks to improvements in the problematic areas of construction permits, property registration and obtaining credit, Ukraine placed 112nd in the World Bank’s Doing Business 2014 rising from 140th place in the previous year’s ranking.
The news comes on the back of the Heritage Foundation’s recent “Index of Economic Freedom Report” in which Ukraine improved by three points.
The latest Heritage Foundation report found that Ukraine had the 155th freest economy out of 178 countries. Ukraine notably improved in business freedom figures: from 45.7 points in 2013 to 59.8 this year. The nation also improved in the control of public spending and monetary freedom indexes.
But even with notable improvements in five of the 10 economic freedoms, Ukraine is still last out of 43 European countries. And its score is lower than the world average.
Instead, the improvements Ukraine displayed could a consequence of the base of comparison. Ukraine’s closest neighbors in the rating – Haiti, Bolivia, Ecuador or Lesotho – improved less than Ukraine.
At the same time, corruption and state capture, a scourge of the Ukrainian economy, are still “the ultimate cause of its poor investment climate and stagnant economic performance,” the World Bank report stated.
“It is rooted in the country’s political culture, built upon an old model of fused political and economic power, a non-transparent and non-competitive privatization process, murky public procurement and state aid,” it says.
The number of ineffective permits, licenses, inspections exceeds an acceptable level, and they are huge sources for abuses. According to the “Index of Economic Freedom report”, the business start-up process has been streamlined, but “completing licensing requirements is still time-consuming and costs more than six times the level of average annual income”.
The World Bank’s “Doing Business 2014” report shows a similar country-level performance. It is still hard for businessmen in Ukraine to get electricity, to pay taxes and to register property. Compared with the previous year’s result, the situation hardly changed.
Because of these obstacles, the private sector has not been given a full chance to prosper, the report said. Ukraine still faces stagnation in the country’s industry, low levels of industrial productivity, and low inflow of high value-added foreign direct investment.
To improve the situation, Ukraine needs to also bring the country’s competition legislation, including state aid provisions, in line with international good practice, boost the capacity and independence of its government anti-trust body, the World Bank’s report suggests.
“To unleash the full potential of the private sector, particularly of small and medium-sized enterprises, comprehensive structural reforms and political commitment to implement them are urgently needed,” says Qimiao Fan, World Bank Country Director for Belarus, Moldova and Ukraine.
Kyiv Post writer Mariia Shamots can be reached at [email protected]
