Download How to increase integration chances of Ukraine

Enhancing Ukraine‘s integration
chances by transferring Slovak
reform know-how
Peter Goliaš, INEKO
June 3rd 2016, Conference in Bratislava
“How to increase integration chances of Ukraine“
Content
• Why should we care?
• What works?
– Reforms lead to quicker economic convergence
– How to break the “Iron law of oligarchy“
• Reforms in Ukraine
• Slovak reform experience
– Informal pro-reform coalition
– Privatization; Reforms in taxes, labor market,
pensions, education; Fiscal stabilization
– Fight against corruption
– Current challenges
Why should we care?
• We have experience from our transition
GDP per capita in Visegrad 4 countries and Ukraine (in purchasing power parity, as % of EU28 average)
120
EU (28 countries)
Czech Republic
100
Hungary
Poland
80
Slovakia
Ukraine
60
40
20
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
Source: INEKO based on data from Eurostat (for V4 and EU28) and the World Bank (for Ukraine)
Why should we care?
• We have experience from our transition
Size of shadow economy in Ukraine and V4 (in % of GDP)
Ukraine
2003
49.7
Czech
Republic
19.5
2015
44.0 (2012)
15.1
Hungary
Poland
Slovakia
EU28
25.0
27.7
18.4
22.6
21.9
23.3
14.1
18.3
Source: Schneider (2015), Schneider (2012)
Why should we care?
• Well-functioning Ukraine is a “hidden trigger“
of our economic growth
• Due to geographical and cultural proximity,
the Visegrad countries would be among
countries mostly benefiting from the stable
and prosperous Ukraine (and vice-versa,
mostly hurt if Ukraine does not succeed)
• Russia is watching closely
What works?
• Well-functioning democracy and economic
prosperity is the best precondition of
successful integration and stability
• Fundamental questions are:
– How to break the “Iron law of oligarchy“?
– How to reform?
Iron law of oligarchy
• 1911: German sociologist Robert Michels
– The new elite will always acquire power for its
own benefit and at the expense of others
• 2012: American economists Daron Acemoglu
and James Robinson (Why Nations Fail)
– To break the Iron law of oligarchy, the country has
to have a broad and strong coalition interested in
setting up “inclusive” institutions and to distribute
political and economic powers in such a way that
they cannot be monopolized by narrow elite
Inclusive institutions
• Political:
– Democratic political system
– Rule of law: Independent justice, regulatory and
controlling authorities
– Free media, transparency, etc.
• Economic:
– Market economy
– Protection of private property
– Effective anti-monopoly policy, etc.
Reforms in Ukraine
Overview of key economic indicators of Ukraine
Real GDP growth
Inflation
Hryvnia per USD exchange rate
Key interest rate
Public debt (% GDP)
Fiscal balance (% GDP)
Unemployment rate
Consumption (annual change)
Industrial production (annual change)
Exports (annual change)
Imports (annual change)
International reserves (in months of
imports)
2013
0.2%
0.5%
8.24
6.50%
39.9
-4.3
7.2%
6.9%
-4.3%
-8.3%
-5.8%
20.4
Source: FocusEconomics, April 12th 2016; (p) - Prognosis
2014
-6.6%
24.9%
15.82
14.00%
69.4
-4.5
9.3%
-8.3%
-10.1%
-14.5%
-29.0%
7.5
2015
-9.9%
43.3%
24.03
22.00%
79.4
-1.6
-20.2%
-13.0%
-29.9%
-32.8%
13.3
2016 (p)
1.3%
14.1%
26.73
16.38%
2.3%
-
Reforms in Ukraine
• Radical liberalization of energy prices
Gas price for households (in Ukrainian hryvnia (UAH) per 1,000 cubic meters)
Basic tariff
Until May 1st 2014
UAH 721
May 1st 2014
UAH 1,089
April 1st 2015
UAH 3,600
May 1st 2016
UAH 6,879
Source: UNIAN (2014), Ukraine Today (2015), Bloomberg (2016)
•
•
•
•
2014: Tax reform abolishing numerous exemptions
2016: Cut of social contributions from 41% to 22%
Cleaning-up banks: Liquidation of 50 out of 180 banks
Start of privatization of 3,300 state companies
Reforms in Ukraine
• Severe austerity:
– Pensions have fallen by about 40% in real terms over
2014-2015
– The number of teachers has been cut by about 15%
• New anti-corruption institutions
• Electronic public procurement system ProZorro
that will be mandatory for all public tenders as of
August 2016
• 2016: The Deep and Comprehensive Free Trade
Agreement (DCFTA) with the EU
Reforms in Ukraine
• Judiciary reform:
– All judges have to undergo a certification process that
assesses their professional competency and integrity
– Supreme Council of Justice, an independent body
charged with appointing of new judges has been
created
• Mobilization of civil society:
– “Reanimation Package of Reforms” (RPR): Around 50
NGOs, independent media and 40 young members of
parliament (Euro-optimists) have formed a coalition
proposing, monitoring and advocating for reforms
Reforms in Ukraine - flaws
• Weak implementation due to resistance of strong
interest groups
• Political bargaining around funding, nominations and
providing data to the anti-corruption institutions
• Corruption perception worse than before Maidan
• Significant delays regarding the law on a new energy
regulator, and splitting Naftogaz into smaller energy
companies
• Halted decentralization
• Most of political parties still have an “owner,” who
finances them and expects them to take care of his
interests in exchange
Slovak reform experience
• Key success factor: Creating informal coalition
of people supporting democracy and reforms
– Think-tanks and advocacy NGOs
– Free media
– Experts and particularly bank analysts engaging in
public discourse
– Reform-minded politicians and policy makers (e.g.
Ivan Mikloš)
Slovak reform experience
• Transparent privatization in 1999-2006
– International tenders with price as the single
winning criteria
– Direct selling to strategic investors
– Establishing independent regulatory authorities
– Cleaning-up and full privatization of the banking
and insurance sector
– Partial privatization of energy companies (49%
with managerial control) and telecom industry
– Price liberalization (gas, electricity)
Slovak reform experience
• Tax reform (2004)
– Introducing flat tax – Unifying direct income taxes
to 19% for individuals and businesses
– Radical simplification of the tax code (abolishing
most of exceptions, exemptions, specific tax rates
and regimes, minor taxes)
– Increasing the basic personal allowance
deductible from the tax base
– Introducing tax bonuses for children
Slovak reform experience
• Labor market reform (2003) introducing more
flexible Labor Code
–
–
–
–
Weaker Labor Unions
Decreasing costs of firing
More flexible overtime and working hours
More flexible fixed-term and part-time contracts
• Pension reform (2004-05)
– Linking benefits to contributions
– Introducing fully funded second pillar
– Prolonging retirement age, automatic indexation, etc.
Slovak reform experience
Gross nominal returns of funds in the fully funded second pension pillar (annual
weighted averages)
15%
10%
5%
0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-5%
-10%
Bond
Source: INEKO
Mixed
Equity
Index
2015
Slovak reform experience
• Education reforms introducing per-pupil
financing (2003) and improving measurement
of results (2012)
• Fiscal stabilization
– Strengthening analytical capacities at the Ministry
of Finance
– 2012: Constitutional Act on Budget Responsibility
introducing the debt brakes and establishing the
Council for Budget Responsibility
Slovak reform experience
Public finance balance in Slovakia (% GDP)
2008
2009
2010
2011
2012
2013
2014
2015
2016 (f)
2017 (f)
2018 (f)
2019 (f)
1
0
-1
-2
Structurally balanced budget
-3
-4
Deficit under 3% GDP - Exit from EDP
-5
-6
Two major consolidations: 2011 (Expenditures), 2013 (Revenues)
-7
-8
-9
Public finance balance
Structural balance (CBR SR)
Structural balance (MF SR)
Sources: Ministry of Finance (MF SR), Council for Budget Responsibility (CBR SR)
Slovak reform experience
Public debt in Slovakia (% GDP)
60
52.4
55
2.1
50
45
40
36
0
35
30
40.8
0
43.3
0.2
3.3
3.5
48.6
49.4
52.9
3.2
47.9
52.9
3.1
47.8
52.2
3
47.7
55
49.8
2.8
47.3
50
2.7
45
43
40
45.7
39.1
35
28.2
0
30
50.3
20
53.9
42.2
25
15
46.8
60
55
36.0
40.8
51.7
50.4
49.7
49.8
49.2
43.1
47.0
25
44.6
20
15
28.2
10
10
5
5
0
0
2008
2009
2010
2011
2012
2013
2014
2015
2016 (f)
2017 (f)
Gross public debt less EFSF, ESM
Gross public debt due to EFSF and ESM
Net public debt
Total gross public debt
Source: INEKO based on data from the Ministry of Finance (MF SR)
2018 (f)
2019 (f)
Slovak reform experience
Long-term sustainability GAP indicator in Slovakia (% GDP)
10
9
Deficit reduction (expenditures)
8
7
6
Reform of the PAYG
5
Deficit reduction (revenues)
4
3
2
1
0
2009
2010
2011
2012
2013
Indicator of long-term sustainability (GAP)
Source: Council for Budget Responsibility (CBR SR)
2014
2015
Slovak reform experience
• Fight against corruption
– 2000: Free Access to Information Act
– 2003: Online business registry (user-friendly,
searchable)
– 2004: Specialized Court and Prosecutor’s Office
– 2007: Online Land Registry
– 2011: Publishing all property contracts and
invoices of public institutions on internet. The
contracts are not valid unless they are published.
– 2012: Publishing court rulings on internet
Current challenges
• Reducing influence of local oligarchs on politics
– More independent and efficient judiciary, police and
prosecutors, etc.
– Anti shell-firms legislation, etc.
• “Value for money” project seeking to increase
transparency and efficiency of public spending
and decision making
– Opening public data
– Measuring quality and efficiency of public expenditure
and regulations
• Reducing long-term unemployment, etc.
Thank you for your attention!
For more information, check the study: Enhancing Ukraine‘s integration
chances by transferring Slovak reform know-how
http://www.ineko.sk/clanky/enhancing-ukraine-s-integration-chancesby-transferring-slovak-reform-know-how