|
Contents | How to obtain this publication | Additional info
The following provides a summary of chapter 2 of the OECD Economic Assessment of Ukraine published on 4 September 2007.
Contents
Continued strong growth now depends primarily on improving the business climate
The economy has now built up considerable momentum, and Ukraine still has considerable scope for “catch-up” growth. Nevertheless, some of the factors underlying recent growth are transitory: the terms of trade are expected to deteriorate this year; energy prices are set to rise further; the period of “easy” productivity gains via labour shedding and increases in capacity utilisation has come to an end; and consumer credit growth is bound to slow. If Ukraine is to sustain strong growth over the medium-to-long term, therefore, it will need to make the transition to a pattern of self-sustaining investment- and innovation-led growth. In addition to capital deepening and more efficient resource allocation, this will require maintaining robust total factor productivity (TFP) growth at a time when production factors are being used more intensively. Poor framework conditions for business currently constitute the principal obstacle to increasing the level and efficiency of investment. Entrepreneurs face very high levels of legal, regulatory and policy uncertainty, making any long-term undertaking highly risky (Table 1). The uncertainty and unpredictability of state action stem in many cases from a lack of transparency. These factors, in turn, fuel widespread corruption and undermine property rights. Improving the quality of public administration and strengthening the rule of law thus remain absolutely critical priorities. A consistent, broad-based policy of de-regulation could also do much to address these problems, since excessive and often inconsistent regulation tends to create opportunities for arbitrary bureaucratic action and rent-seeking. However, in many spheres, Ukraine needs better regulation rather than simply less regulation. This will require correcting the many gaps and contradictions that exist in legislative and regulatory frameworks.
Table 1. Governance indicators, 1996–2006
Percentile ranks (1)
1. A higher score denotes a better rank.
Source: World Bank Governance Research Indicator Country Snapshots (2007).
Barriers to entry and impediments to exit need to be reduced
Stimulating robust productivity growth and increased innovation will also require a profound reform of product markets in order to enable the process of creative destruction to unfold. Cross-national empirical studies find that higher firm turnover (i.e. higher entry and exit) is growth-enhancing. Because the restructuring of large state-owned enterprises (SOEs) is fraught with difficulty and often subject to considerable delay, reducing barriers to entry and allowing the growth of new activities has been a crucial engine of transformation in the more successful transition economies. Barriers to entry and exit are still substantial in Ukraine. The economy – particularly the industrial sector – is still dominated by energy-intensive heavy industrial sectors, and this is one reason why so much past policy has been oriented towards averting rather than facilitating needed structural change. Empirical analysis of entry and exit confirms the impression that Ukraine has particular problems with exit.
-
Overall firm turnover rates in manufacturing (entry plus exit) tend to be rather low by OECD standards, although entry rates rose sharply after 1995. Exit rates, by contrast, remain extremely low and appear to account for most of the difference between Ukraine’s turnover rates and those of OECD members.
-
Entering firms in Ukraine are significantly more productive than incumbents – around 40% more productive on average, for the entire 1992–2005 period. This may reflect entrants’ awareness of the difficult conditions in which they will operate – they will need to be exceptionally efficient to have a reasonable chance to survive and grow.
-
The selection of firms for exit in Ukraine appears to be inefficient, as the link between productivity performance and exit is weak. In particular, exiting new private firms are significantly more productive than the surviving privatised firms and SOEs.
Implicit and explicit subsidies and excessive state ownership add to the impediments to exit
The weak link between productivity and survival is largely the product of the wide array of explicit and implicit subsidies provided to particular sectors and enterprises. While these are not limited to “old” firms, it is fairly clear that such subsidies enable poorly performing incumbents to remain on the market far longer than they would otherwise. Continued support for a large population of SOEs constitutes yet another part of the problem with exit: on the official data, roughly 48% of the country’s capital stock was still in the hands of the state or municipal authorities at the end of 2005, with a further 10–11% in mixed public–private ownership. The size of the SOE sector serves to limit both exit and restructuring; this, in turn, reduces the scope for new entry, both because lack of exit limits the resources available to new entrants and because SOEs often enjoy formal or informal privileges that make it harder for entrants to compete with them. Moreover, the weak corporate governance of most SOEs means that many, perhaps most, are easy targets for rent-seeking by insider-managers or well connected outsiders. In many cases, continued state ownership of such assets also distorts competition and creates conflicts of interest for the authorities, particularly where the state’s role as regulator is in tension with its role as owner.
Over-regulation constrains firms’ growth…
In Ukraine as elsewhere, barriers to entry, exit and reallocation are often the product of excessive and often ill administered regulation. A systematic assessment of product-market regulation (PMR) in Ukraine using the indicators developed by the OECD Economics Department highlights the potential contribution that competition-enhancing regulatory reform could make to the country’s economic performance:
-
The level of overall product-market regulation is higher than that of any OECD country in 2003 (Figure 1). While Ukraine scores relatively well on some of the sixteen individual PMR indicators, particularly in areas where reforms have recently been undertaken, the burden of product-market regulation is well above the OECD average with respect to all three major components of the aggregate indicator: state control, barriers to entrepreneurship and barriers to trade and investment.
-
Overall, barriers to business growth appear to be more constraining than barriers to entry. There has actually been considerable improvement with respect to market entry in recent years, but the regulatory impediments to growing businesses of whatever size remain extremely onerous. The burden imposed by the excessive application of licensing and permit regimes is particularly great (Figure 2), as is the cumulative cost of the bewildering array of rules and regulations governing issues like property registration and the conclusion of contracts. These serve little purpose except to raise transaction costs, in terms of both time and money.
-
Regulatory process is in some respects as much of a problem as the substance of regulation. Ukraine scores rather poorly on indicators concerned with such issues as the formulation of regulatory policy and effective communication with the business community. This reflects in part a failure to define with clarity the various roles that the state is to play in the economy or to differentiate between them in ways that avoid undesirable conflicts of interest.
Figure 1. Aggregate product-market regulation indicator
Source: OECD.
Figure 2. Product-market regulation indicator for licences and permits
Source: OECD.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It summarises the OECD assessment. The complete edition of the OECD Economic Assessment of Ukraine 2007 is available from:
- SourceOECD for subscribing institutions and many libraries
-
-
OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
-
Additional information
For further information please contact the Ukraine Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Christian Gianella and William Tompson under the supervision of Andreas Wörgötter.
|
Economic Policy Reforms: Going for Growth 2008
