17 november8th portoroz business conference valentin zelenyuk kyiv economics institute, upeg at...

17 November 8th Portoroz Business Conference

Valentin ZelenyukKyiv Economics Institute, UPEG at EROC/EERC

Ukraine: Current Position and

Opportunities


Cherkas’kaVinnyts’ka

Mykolayivs’ka

Kirovohrads’ka

Ivano-Frankivs’ka

L’vivs’ka

Ternopil’s’kaKhmel’nyts’ka

Volyns’kaRivnens’ka

Zytomyrs’ka

Kyivs’ka

KYIV

Chernihivs’kaSums’ka

Poltavs’ka

Odes’ka

Khersons’ka

AR Krym

Kharkivs’ka

Zaporiz’ka

Dnipropetrovs’kaDonets’ka

Luhans’ka

ROMANIA

HUNGARY

SLOVAKIA

POLAND

BELARUSRUSSIA

RUSSIA

BULGARIA

Sevastopol’

Legend

RightLeft

MOLDOVA

Ukraine: East and West


Key Economic Indicators

Table 1 2002 2003 2004 2005GDP, current prices, blns US 42,4 49,4 56,5 61,1GDP growth, % (USD valued) 12% 16% 14% 8%Aver. nominal monthly wage 70,7 86,7 110,8 201,9Total investment, blns US 7,0 9,6 14,2 18,4Total Ind. Output, blns US 38,1 41,4 61,4 69,1Budget deficit, blns US -0,3 0,1 2,1 1,5Gov't budget deficit (% of GDP) -0,7 0,2 3,2 1,8Gross external debt, US mn 11564 21524 27993 NAForeign Reserves, mlns US 4417 6937 9525 19395Export (mln of US) 17957 23067 32672 NAImport (mln of US) 16977 23020 28996 NAFDI inflows, USD in blns 0,7 1,4 1,7 7,5Exchange rate to 1 USD 5,32 5,33 5,30 5,05

Source: IMF, UN, NBU


Key Demographic Indicators

Table 2 2002 2003 2004 2005

Population (mlns, available) 48,0 47,6 47,3 46,9Population growth (annual%) -1,0% -0,8% -0,7% -0,7%Life expectancy (years) 68,2 68,2 67,96 NAFertility rate 1.12 1.12 1.12 1.12Infant mortality rate (per 1,000) 10,3 9,6 9,5 NAMortality rate under 5 years of age (per 1,000 children) NA NA 18 NAImmunization, measles (% of children aged <12 months) 99 99 99 NALiteracy rate, adult female (% of total females, >15 years 99.2 99.2 99.2 NA

Source: Statistical Committee of Ukraine, WDI Ukraine Human Development Report


Did We Have a Miracle in 2004?

Annual growth of 12.1% in 2004

Average annual growth of about 9% in 2000-2004

Was that an Economic Miracle?

No! It was just a normal recovery that, on the background of huge economic downfall, may look misleadingly enormous.


Real GDP Chain Index (Cumulative)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

YearsValu

e o

f C

hain

Indexes (

1990 is

base)

Real GDP Index Real Cap. Inv. Index Real Wage Index

Even after strong growth since 2000, Ukraine’s Real GDP is Still under 65% relative to 1990


What happened to one of the richest economy of former USSR?

1991: Collapse– negative aggregate supply shock due to

‘disorganization’

– cuts in demands for inputs

– inflation in 1993 was about 10,000%!!!

1991-1993: Almost no key economic reforms!– This was the main reason for the economic downfall

Ukraine faced till 1999.


Slow Reforms

1994-1996: First Reforms (pushed by IMF)– Tightening of budget – Strict monetary policy

1996: Attempt for Key Economic Reforms– Kuchma’s ‘dream team’ (V. Yushchenko, V.

Pynzenyk, Y.Yekhanurov, etc.)– Reforms failed going through the Parliament

1996-1998: Economic Stagnation


Efficiency Levels of Transitional Countries Relative to Best-Practice World Frontier

0%10%20%30%40%50%60%70%80%

Selected Transitional Countries

Eff

icie

nc

y L

ev

el,

%

1992

2000

Fall in Relative Productivity


1998: Partial Reforms passed by Kuchma’s decrees to circumvent parliament’s blocking– rise in privatization (led by Yekhanurov)

– ‘single’&simple tax for private entrepreneurs 1999: Stop of downfall in GDP 2000-2004: Economic Boom

– Boom on world market for steel products

– Decrease of income tax in 2004 (from varying rate of about 40% to the flat rate of 13%)

• 12.1% growth in real GDP in 2004!

• But, still under 65% relative to GDP in 1990!

Progress of Reforms


Orange Revolution


More Democratic Society– Free and competing press– People feel their opinion matters and that they can

change thing if they get together

People at power started recognizing opinion of regular people—that they matter!– The ‘white-blue’ elite realized it– The ‘Orange’ elite realized it too

The very first year after revolution was hard!

Consequences of Orange Revolution


Hard Post-Revolutionary Period

2005: Sudden Fall in Economic Growth (2.6%)!!!

0,0

2,0

4,0

6,0

8,0

10,0

12,0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Real GDP Growth Inflation (rel.to Dec.04) Manufacturing Output Growth


Reasons for Poor Performance in 2005

Recession on world market for steel Possibly strategic reduction at steel works Non-market attempts to control prices Major Reason: ‘Property Rights Shakeout’

– Old Oligarchs stopped investing, but rather tried to secure remaining property, New Oligarchs stopped investing and rather tried to grab the lucrative property of Old Oligarchs, Foreign Investors took awaiting strategy


Additional Trouble: Split of the ‘Orange team’!

Property Rights vs. Investments

Growth of Capital Investments: 2003, 2004, 2005

0

10

20

30

40

50

60

1Q 2Q 3Q 4Q

Quarters of the Years

Gro

wth

, %

(in

real

term

s)

2003

2004

2005


-15

-10

-5

0

5

10

15

20

25

30

35

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Real Wage Growth Inflation (rel.to Dec.04) Unemployment

Rise of Welfare of Citizens in 2005


Ukrainian Banking: Positive Example

Annual industry growth is about 50% over the last 5 years.

Relatively High Competition

HHI is about 400

CR10 is below 60%

Becoming more transparent

Foreign presence is increasing


Ukrainian Banking: Number of Players

76

133

211 216

11

1

218

111

215

12

2

205

16

6

186

19

9

173

22

8

164

24

7

168

15

6

162

13

7

160

12

7

163

12

7

162

14

9

160

19

11

0

50

100

150

200

250

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 July 2006

Number of registered local capital banks Number of banks with foreign capital Banks with 100% foreign capital

Number

of banks


Banking: Share of Foreign Ownership

15,5 16,2 15,915,0

24,0

30,0

15,514,5

0,0

5,0

10,0

15,0

20,0

25,0

30,0

01.01.00 01.01.01 01.01.02 01.01.03 01.01.04 01.01.05 01.01.06 01.07.06*

%


Banking: Share of Foreign Ownership

98 95 90 85

7060

30

0

10

20

30

40

50

60

70

80

90

100

Estonia SlovakRepublic

Hungary CzechRepublic

Poland Romania Ukraine

%


Ukraine: Comparative Advantages

1. Relatively high level of human capital in math, theoretical physics and chemistry airplanes and aeronautic equipment electronics (for military and aeronautics), etc.

2. Good geographical location: on the crossroads b/w Asia and Europe relatively decent transportation and communication infrastructure


1. Small reserves of oil and natural gas??? not infected by the “Dutch disease” not infected by the “Venezuela disease” (or “Russian disease”?)

2. Absence of a Clear Signal from the EU public is confused on international policy increased Russian influence

Ukraine: Comparative Disadvantages


More Stable Could be More Stable under Broad Coalition Exist Good Opposition Government is More Pragmatic and United

– Very Close to Enter WTO– Interested in Further Economic Reforms– Likely to Enter NATO, but not before 2008

Country Economic Perspectives Seems to be: – Very Bright!

Current Political Situation


Further Economic Reforms Needed

Real GDP Growth: 2005 and 2006

0,01,02,0

3,04,05,06,0

7,08,09,0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

% y

oy

gro

wth

2005 2006 2006 forecast

Economic Forecast: 2006: GDP growth 7.5%, Inflation 11% 2007: GDP growth 8.2%, Inflation 8.5%


Need Further Reduction of Tax Burden– Corporate Profit Tax (from 25% to 15%)– Simplifying Procedure– VAT (from 20% to 15%)

Need Pension Reform– Reduction of Social Tax (from 37% to 15%)– Needs to be privately-funded.

Further Economic Reforms Needed


Need to Continue Fair Privatization– Through Open Auctions.

• Privatization of largest steel mill in Ukraine, “Kryvoryzhstal”, gave a good example

No re-privatization of private property

Land must be sold on open auctions

Reduction of Oligopoly Power in Real Estate market

What is Needed for Economic Miracle?


Clever Monetary Policy– Switch to Inflation Targeting, etc.

Strong Banking– Encourage merging of small banks into large

Promotion of Stock Market

What is Needed for Economic Miracle?


Questions are very Welcome!!!

17 november8th portoroz business conference valentin zelenyuk kyiv economics institute, upeg at...

Documents

economic stagnation

west slide

economic growth

relative productivity

economic miracle

economic downfall ukraine

economic boom boom

partial reforms