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Contents | How to obtain this publication | Additional info
The following provides a summary of chapter 3 of the OECD Economic Assessment of Ukraine published on 4 September 2007.
Contents
Maintaining external competitiveness is likely to prove increasingly difficult in the years to come
An analysis of Ukraine’s revealed comparative advantages and disadvantages reveals that the country’s export competitiveness is very narrowly based: its export structure is highly concentrated, chiefly in goods with a low degree of processing (Figure 1). Food products, minerals and metals accounted for 65% of the export bill in 2006, up from 59% in 2000. Rapid wage growth has largely erased the labour-cost competitiveness gains that Ukraine enjoyed after the 1998 crisis, and the competitiveness of the export sector has been hit in recent years by sharp increases in the price of natural gas imports and the tendency towards real appreciation vis-à-vis dollar-linked Asian currencies. Both these trends are likely to continue. The gas-price issue is particularly sensitive, given that a large part of Ukraine’s export bill consists of energy-intensive manufactures. Moreover, opportunities for relatively easy productivity gains via labour-shedding and increased capacity utilisation are becoming rarer. Finally, the evidence suggests that Ukrainian manufacturers find it difficult to compete on quality in non-CIS markets.
Figure 1. Share of high and medium high-technology in
manufacturing exports to OECD countries
As a percentage of manufacturing exports, 2004
Source: OECD, STAN Bilateral Trade Database 2006/I and OECD calculations based on OECD ITCS database.
Competition-friendly regulatory reform could contribute to stronger productivity growth…
The results of the PMR exercise suggest that regulatory reform could contribute to greater efficiency of both resource allocation and production, accelerating Ukraine’s convergence with its more advanced neighbours. Indeed, the potential benefits of increasing competition are likely to be greater in Ukraine than in most OECD members or in many neighbouring countries, because competition in Ukrainian markets, though increasing in recent years, is relatively weak overall. Markets tend to be very concentrated at national level and the high degree of segmentation between regional markets means that competition is weaker still at regional level. The positive effects of enhanced competition find confirmation in an econometric analysis of the impact of competition on labour productivity, using enterprise-level data for 2000–05 (Table 1). The following conclusions emerge from this analysis:
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Concentration has a negative and highly significant effect on labour productivity growth.
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These results are robust for manufacturing as a whole, and there is no evidence that the relationship is stronger when import- or export-competing industries are considered separately.
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For market services, the effect is found to be weaker but still substantial.
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Import competition has a positive impact on domestic firms’ productivity. The effect is stronger where foreign penetration is lower, which may suggest that the initial opening to imports has a particularly strong effect in stimulating local firms to raise productivity.
Table 1. Labour productivity regressions
Fixed effects estimations.
t-statistics in parenthesis.
* significant at 10% level; ** significant at 5% level; *** significant at 1% level.
1. Distance to frontier is computed as the difference between the highest productivity in the sector and firm's productivity.
Source: OECD calculations using the register of Ukrainian enterprises, 2000-05.
…and enhance Ukraine’s attractions as a location for foreign direct investment
One of the major disappointments of Ukraine’s performance to date has been its relative failure to attract foreign direct investment (FDI): the stock of FDI per capita reached only 372 USD in 2005, just over 16% of the corresponding figure for neighbouring Poland. This would appear to be far below Ukraine’s potential, given its human capital endowments and the comparative advantages conferred by relatively low wages, proximity to EU markets and the size of the domestic market. Institutions like the rule of law and the quality of bureaucracy are among the most important determinants of FDI location, and the institutional and regulatory problems identified above appear to constitute the major reasons for low FDI inflows. While the economy is very open in many respects, the PMR benchmarking exercise highlights the exceptionally high regulatory barriers to trade and investment in Ukraine. However, one should not exaggerate the degree of discrimination: the main barriers to investment are rooted in the overall institutional and regulatory framework encountered by all firms, foreign and domestic. Given the potentially substantial positive effect of FDI on domestic TFP growth, Ukraine is missing a major opportunity to facilitate industrial modernisation. However, the corollary to this conclusion is that steps to address regulatory and institutional weaknesses could bring significant benefits. Accession to the World Trade Organisation (WTO) is likely to help. The direct benefits of WTO accession, via tariffs changes and improved access to foreign markets, are likely to be limited, but the welfare gains arising from the reduction in formal and informal barriers to foreign investment, the strengthening of property rights and the overhaul of technical regulation are expected to be substantial indeed.
Further privatisation could magnify the benefits of increased competition
Research on developed market economies, developing countries and economies in transition shows that private enterprises generally respond more readily to increasing competitive pressures than do SOEs and that the gains from privatisation tend to be greater where privatised enterprises are subject to competition. This complementarity between competition and privatisation suggests that competition-enhancing reforms would achieve greater impact if accompanied by a reduction in the role of SOEs in the economy. The loss of privatisation momentum in Ukraine is therefore particularly unfortunate. The defects of Ukrainian privatisation processes cannot be denied and account for much of the criticism of privatisation within the country, but they should not deflect attention from the positive impact of privatisation on enterprise performance. An analysis of longitudinal, enterprise-level data on manufacturing firms finds that in the case of privatisation to domestic owners, total factor productivity increases by between 10 and 25%, depending on the specification used, during the seven years following privatisation (Figure 2). The impact of privatisation to foreign owners appears to be even stronger, though the results are less robust, owing to the sample size. Positive effects appear within a year of privatisation and continue increasing thereafter. This implies that the contribution of privatisation to aggregate manufacturing productivity growth in recent years has been substantial.
Figure 2. Multi-factor productivity impact of privatisation
Source: Brown and Earle (2007), "The Productivity Effects of Privatization in Ukraine: Estimates from Comprehensive Manufacturing Firm Panel Data, 1989-2005", Background paper prepared for the 2007 Economic Policy Seminar on Ukraine, May.
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:
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OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
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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.
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