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2. The Programme of Economic Reforms for the period 2010-2014
Dr. Manuela Troschke
The institutionalisation of a special body bearing responsibility for economic reforms in Ukraine was a step that had been expected for various reasons: first, the strong economic downturn in the aftermath of the global financial crisis called for a solution. Second, state finance was close to default and needed sustained backing by IMF loans. And third, international experts like Anders Åslund recommended the establishment of such a body to make reforms independent of day-to-day political decisions and to grant implementation and irreversibility (Independent International Experts Commission: Proposal for Ukraine: 2010 - Time for Reforms).
What was institutionalised by Presidential Decree on March 17th (Decree № 355/2010), however, was not quite what independent experts had originally envisaged: instead of a commission at the Cabinet of Ministers headed by a Deputy Prime Minister, a commission at the Presidential Administration headed by the President himself has been formed. Under such an institutional setting, the Committee of Economic Reforms can be qualified as a new central governing body similar to the Security Council. Information rights at all levels of executive organs are comprehensive, and since the body is given rights to prepare bills, it even has an - albeit informal - right to initiate legislation, while the role of the parliament is weakened. No limitation of the time horizon of these extraordinary powers is foreseen in the Decree. Only by the end of June an additional body - the so-called Coordination Center - was established to assign at least a formal role to the cabinet of ministers and to the Parliament. This sub-body shall advise the Committee in designing reforms with the help of research and consultant institutions monitor the proceeding of reforms and is headed by Prime-Minister Asarov and Head of the Parliament Litvin.
The committee is led by Irina Akimova, First Deputy of the Presidential Administration, who has worked for international economic think-tanks, but also for a well-known oligarch. The committee is organised in six working groups, who reflect the whole spectre of envisaged reforms: (1) Legal and institutional settings, (2) International integration and cooperation, (3) Regional Economic Development, (4) Sound economic development, business climate and investment, (5) Technical Modernisation and Infrastructure and (6) Reforms of the Social Sphere and Enhancement of Quality of Life. All working groups are headed by the relevant ministers or deputy ministers and other relevant executive bodies; international participation comes in form of International Finance Organisations and other international experts in group 4, and Members of the European Council and other international experts in group 3, which comprise the longest list of members. Modernisation and social sphere so far do not see international consultants and have only a handful of members, which gives already a first impression on the relative importance assigned to the different reform packages.
The high-ranking institutional setting of the reform committee together with clear majorities in parliament on the one hand allows for quick designing and approving of economic reforms that are urgently needed. On the other hand neither a broad discussion of reforms in Parliament nor a broad participation of civic society institutions and the media can be expected under such circumstances. In contrary to other Presidential bodies however, at least a commitment to publicity and transparency has been made - sessions are open to the public, the Committee has its own website and is regularly publishing news, giving room to critical articles as well. Meetings and decisions met at the national working groups, however, are as opaque as ever.
The main title of the Programme of Economic Reforms indicates that the Programme is not only focused on economics, but on broader and more general issues as well: "powerful society, competitive economy, effective government". However, what is written in four chapters and 18 sub-chapters on 85 pages, justifies to call the Programme a mere economic one - the powerful society seems to be grounded on reforms of social services alone, and building an effective government does not even show up in a separate chapter. This is a clear deviation from the comprehensive reform recommendations, "Proposals for Ukraine: 2010-Time for Reforms", made by the Independent International Expert Commission chaired by Anders Åslund in the end of 2009, who states that "without reforming the state, all other reforms will end up as a waste of resources" (p.13).
The sub-chapters are logically structured and in that respect nearly ideal if compared to the former reform programmes - an analysis of the status quo by singling out problems and reasons for the problems is followed by clear-cut goals and tasks and the description of necessary steps to reach each of these goals including a time-table. Each chapter is closed with the specification of several indicators of success. However, while problems and reasons inherited from former governments are described so comprehensive and critical that a further erosion of the situation does not seem to be possible, main issues immanent to the Ukrainian economy like corruption or oligarchic structures remain completely untouched. Additionally, many sub-chapters lack concrete formulation of tasks and success-indicators remain vague in many aspects. International Experts like the IMF criticise the recommendations to be of too general nature, and the time-table and many goals to be not ambitious enough (Press office of President Yanukovych from 02.06.2010).
The first chapter of the Programme, "Sound economic development", is devoted to questions of macroeconomic and financial stabilisation, tax reforms and fiscal decentralisation, and reforms of the banking sector subsequent to the crisis. The Independent International Experts Commission recommendations show up here, as do long-standing IMF conditions and policy recommendation papers of local and international think-tanks partly stemming from pre-orange-revolution-times (see IOS memoranda No.15 to No.23 for more information). With all steps taken, Ukraine could possibly arrive at its starting point, before the financial crisis hit the economy hard, but with structural problems remaining unsolved, the country would not be better prepared for the next wave of external shocks.
Questions of how to improve the living standard of Ukrainian citizens are lined out in the second chapter. Medical service, pension system, education and social transfers are singled out here. While the main concern is on fiscal effects of reforms on the state budget, the well-being of the citizen, still contained in the (inofficial) Russian version is not longer to be found in the official document. The task to finance the development of human capital and innovation is mainly assigned to private entities, which might be fruitful in the US, but not in the Ukrainian institutional context. This chapter is by far the weakest one: analysis suffers from not mentioning wide-spread corruption in these sectors, tasks and goals remain extremely vague and opaque, and success indicators range from weak to over-optimistic.
Ambitious is the goal to improve the business climate and investment in Ukraine formulated at the beginning of chapter three, which is addressing these problems in great detail and four sub-chapters. As for deregulation and development of business, the concrete goal is to advance on the scale of the World Bank Doing Business Index by 40 points till 2012. While this indicator is formulated by the Independent International Experts Commission paper as an "external anchor" for reforms in the business sector, data since 2000 do not back the optimism. (Doing Business Rankings). Dedicating new efforts to intensified privatisation and better administration of state property is another task formulated in the Programme, but reforms of the Anti-Monopoly-Committee or better disclosure of information on property structures of the big holdings and hence the oligarchic structure of the economy are not under discussion. The sub-chapter on international integration reflects standard recommendations of western donor countries, but is also committed to further integration into CIS structures and dual agreements with Russia.
Modernisation of infrastructure and basic sectors is the challenge put forward in the last chapter. Driven by IMF-conditionality and the EU-Ukraine Joint Declaration, price-setting in the electricity and gas sector shall be reformed completely. According to the Programme, price subsidies for selected enterprises will be cut already in 2010, cross-subsidisation shall cease, energy prices shall reach cost-recovery levels. To ease social costs, needy parts of the population will be targeted directly. Restructuring of the gas sector includes separation of production and transport, equal access to the pipeline system, introduction of cost-pricing among others and shall be finished by 2014. In the coal mining sector, complete privatisation of all mines is envisaged till 2014, subsidies shall be cut by 80%. While all this is a blueprint of IMF and EU recommendations, expectations should not be too high: The energy sector, especially the gas sector, is the playing ground for political price-setting, grand corruption and rent-seeking, and the Programme does not address the question of who will implement and monitor the reforms. A new strong and independent body bearing responsibility is not in sight, reforms may stay cosmetic, enterprises may be compensated by other means. The problem of tremendous high energy inefficiency - despite being dependant from energy imports Ukraine is one of the most energy efficient countries in the world (OEI Working Paper No.226 on energy efficiency (in German)) - is not addressed in a special chapter. The measurable goal put forward by Åslund et al. to cut energy consumption relative to GDP by realistic 50%, has been reduced to a mere 20%, which sheds some light on the expected measurable results of energy reforms.
III Improvement of business climate and investment attraction
Deregulation and development of business (Dr. Manuela Troschke, IOS)
Privatisation and state property management
Development of science, technology, and innovation
International integration and collaboration
IV Modernisation of infrastructure and basic sectors
Electricity sector reform (Dr. Petra Opitz, DIW econ)
Coal sector reform (Dr. Petra Opitz, DIW econ)
Oil and gas sector reform (Dr. Petra Opitz, DIW econ)
Public utility reform
Transport infrastructure development
Agricultural development and land reform
The Ukrainian economy of 2010 is, no doubt, in need of reforms. This need exists since independency, was not pressing in times of high economic albeit not sustainable growth, but became inevitable after the financial crisis revealed structural weaknesses and hit the country so hard that help of the IMF became vital for economic survival of the country. Together with the new presidency and political turmoil over, the window of opportunity for reforms is open. However, timing, administrative settings, scope of the Programme and indicators used to measure progress cause doubts on whether politicians are really committed to reforms.
To introduce a reform programme in times of trouble is normal; to introduce in good times is credible. The Reform Programme does not cover new topics, but topics under discussion for many years. None of the governments that had been active over the last decade proved able to solve the structural problems of the Ukrainian economy, which is distorted by state capture, corruption, short-term rent-seeking instead of long-term investment and an increasingly oligarchic structure of the economy. Being under financial pressure now, the Ukrainian government committed itself to carry out reforms called for by the international community since 1991 in a time frame till 2014.
Why should politicians decide to deprive themselves of a possibility of staying in power now? More than in good times, crisis-shaken ruling elites and oligarchs have to be compensated for supporting the government, more than in good times political opponents have to be excluded from distribution of diminishing rents in all sectors. The administrative settings of the Reform Programme enable politicians to do so without being controlled by the parliament. Instead of being localised at the Cabinet of Ministers, it is the Presidential Administration who is responsible for the Reform Programme with unlimited extraordinary powers. Administrative and juridical reforms initiating an irreversible division of power stay untouched. Reforms do not come from below, but are imposed from above and even outside, excluding bureaucrats from becoming proprietors of the reform process. In that setting any future economic growth is likely to be used as substitute to reforms.
The scope of the Reform Programme is disappointing in several aspects: reforms are not future-oriented, reforms are not green, and reforms do not touch the destructive oligarchic structure of economy and society. Core parts of the Programme are streamlined to questions of cutting public expenditures and raising public revenues. While IMF pressure is visible here and targets are relatively clear-cut, the two small chapters dealing with education, science and innovation are the least detailed and the least concrete. It does not come as a surprise that reforms are not green since there is little pressure from international donors, little recommendation and consulting input from advisors, and very little incentive to diminish the scope of rent-seeking possibilities within the government. Expected gains from emission trading with EU are not concrete enough and their interpersonal allocation not sure enough to convince successful rent-seeking actors to invest in energy efficiency measures. With high energy intensity of the Ukrainian economy persisting, two core problems of the Ukrainian economy, energy dependency and rent-seeking behaviour, cannot be solved. This addresses the third severe weakness of the Reform Programme - lacking commitment to pursue a sound competition policy that aims at reducing rent-seeking, state capture and grand corruption. To introduce such a reform chapter would have called for an analysis of the status quo - which cannot be analysed since information is lacking and actors are not interesting in disclosing their ownership structures to the public.
The President Yanukovych finally signed the new Tax Code on 3 December 2010. The document has been severely opposed by entrepreneurs representing small and medium enterprises (SMEs) (see korrespondent). Due to their protests, the system of simplified taxation will stay unchanged till further amendments regarding taxation of SMEs are elaborated.
The adoption of the Tax Code was a milestone of reforms to be reached according to the IMF Stand-By Arrangement concluded in July 2010. While next IMF board discussions are envisaged for the end of December, the timely adoption of the Tax Code has opened the way for payment of the second credit tranche amounting to 1.6 US$ billion.
In order to rehabilitate state finances and to accomplish/satisfy conditionalities of IMF lending, the Ukrainian government within the Programme of Economic Reforms 2010-2014 committed itself to adopt a new tax code till end of 2010.
The draft document, which consists of more than 500 pages, has been welcomed by the international community and the IMF - but not by Ukrainian small and medium-sized enterprises (SMEs).
While corporate taxes in general will be substantially reduced making Ukraine a tax haven of the region, many SMEs which as yet can opt for simplified taxation rules, enjoy tax breaks and are not obliged to contribute to the pension fund, in future will be subject to normal taxation. Since they would profit from reduced corporate taxes, the overall tax burden of SMEs could be expected not to exceed actual payments. However, for several weeks and with increasing dynamics, entrepreneurs from all regions of Ukraine demonstrate against the adoption of the New Tax Code. Around the 6th anniversary of the Orange Revolution, the protesting parties occupied the central square, Maidan, in Kiev, and recently they even decided to initiate the foundation of a new political party - "Civic movement of Ukraine". In contrast to the Orange Revolution, it is a pure Ukrainian bottom-up movement with no foreign support in finance and organisation.
The social upheavals caused by seemingly minor changes of rules for SMEs reveal the deep problems underlying Ukrainian taxation and even deeper mistrust of entrepreneurs who do not belong to big business with political influence. According to their point of view, SMEs will be exposed to increased controls of tax inspectorates and hence to even more corruption payments than prior to the new rules while big business with political influence which has so far to a big extent evaded taxation will profit from decreased tax rates. Protesters claim that the New Tax Code will turn Ukraine to a repressive feudal state where oligarchic clans will rule without control and that 200 articles of the document (that is, more than 50%) have to be changed to meet their requirements (see korrespondent). In Parliamentary sessions on the subject, tumult reminding the Orange Revolution scenes took place. Despite these actions, the draft document was signed by the Head of the Parliament on 26November and the Tax Code was passed on to the president.
Since the IMF will make a decision regarding the payment of the second credit tranche by the end of 2010, the Ukrainian president is caught between Skylla and Charybdis. On 30 November, he finally vetoed the Tax Code and asked the parliament for amendments. Meanwhile, the protests go on. Many SMEs, especially in western regions, closed down their businesses to express the gravity of the problem. The tax revolution is a major political challenge to the president. If the IMF repeats the exercise of suspending payments to Ukraine in case the latter fails to meet the programme conditions, a major economic challenge will be added. With no money left to calm protesters by key amendments to the Tax Code, real reforms of the system of taxation may be the only way out. After vetoing, the president turned to the nation expressing that "exact written rules of taxation payment constitute an effective protection from corruption". The divergence of this perception from obvious real problems of doing business in Ukraine is too evident to be ignored.