CID Archive: Publications Archive: HIID Papers

"The Missing Pillar of a Growth Strategy for Ukraine: Institutional and Policy Reforms for Private Sector Development"

Daniel Kaufmann, September 1997

Summary

For a couple of years now, officials and experts have been predicting the imminent resumption of positive growth in Russia. Such optimistic forecasts are more recent for Ukraine, where reforms started later. Still, neither Ukraine nor Russia will experience economic growth in 1996. For them, as well as for some other NIS countries, this will be the seventh consecutive year of output decline this decade. This takes place in spite of some far-reaching macro-economic reforms having been implemented in recent years. While some of the positive growth effects of reforms implemented this far may be subject to particular lags in these countries -- thus arguing for patience -- a significant part of the answer to why these economies are not turning the corner may lie in the specifics of the unfinished reform agenda.

This paper, taking mainly Ukraine as its case for analysis, argues that while conventional macro-economic stabilization has largely taken place, as well as some liberalization and privatization, a pro-Private Sector Development climate has not been put in place yet. Detailed evidence is presented on the extent of anti-business regulation and tax burden at the firm level. This micro-evidence contrasts sharply with conventional assessments at the aggregate level regarding reform progress in Ukraine.

Evidence is presented on the very high costs for business to operate and for investors to invest, which result from the myriad of administrative, regulatory and tax burdens. Part of these significant cost for business are in illicit payments to officials, which are essential for many firms to survive. The evidence links the regulatory and tax impediments on the one hand, and rent-seeking behavior on the other. Corruption appears to be an inducement for the proliferation of administrative permits, licenses and other impediments requiring discretionary signatures, and raises the cost of doing business particularly for new firms. The empirical link between such regulations (and associated unofficial payments) with the strategies forced upon new firms for them to survive (such as mis-reporting for tax purposes) are also brought out. In addition, aggregate evidence on the evolution of the unofficial economy in Ukraine is presented, placing such data in a comparative perspective with fifteen other countries in the region, and exploring the main determinants for such large increases in the share of unofficial activities.

From this framework of analysis and the evidence presented, implications follow: a program of bold deregulation of economic activity, tax and public sector reform, heretofore neglected in a number of transition economies, become crucial complements to the macro-economic reforms -- if countries like Ukraine are to embark on a vigorous growth path in the near future. There are key complementarities between deregulation, restructuring of the public sector, and expansion of the tax base (while reducing tax rates), arguing for an integrated reform package. Partial reforms are unlikely to lead to positive results regarding corruption amelioration, reduced cost of doing business, and growth resumption. Similar implications may apply from this framework of analysis to other non-growing NIS economies.

Return to HIID Papers Home

Direct site comments or questions to CID's Webmaster.
Copyright © 2007 by the President and Fellows of Harvard College.
Last revised 08/23/2007