World Bank Urges Ukraine to Drop “Insider Economy”
Never before has Ukraine had such favorable conditions as it does now to carry out its strategic policies and crucially important reforms. Most of Ukraine’s economic trends and short-term prospects remain positive. This is the conclusion drawn by international and Ukrainian experts who have drafted a high-profile memorandum on Ukraine’s economic development, called “Ukraine: Laying the Groundwork for Stable Growth,” which will be submitted to the World Bank’s board of governors and management.
Presenting the memorandum in Kyiv, the World Bank’s leading economist John Litwack noted that the Ukrainian economy has shown rapid growth and high macroeconomic stability since 2000. In late 2003 the official GDP was 30% higher than in 1997, industrial output grew by about 56%, and investments in fixed assets doubled. While inflation has been on a steady decline since mid-2000, credit markets have been developing at a fast rate.
Researchers point out that the current economic growth has resulted from favorable external factors (high prices for Ukrainian exports), the government’s economic policies, and significant institutional changes. At the same time, rather serious problems may come up in the future. While external factors look unpredictable, the investment climate leaves much to be desired. Investments in the economy constitute a mere 20% of the GDP. “This is not a catastrophe for Ukraine, of course, but it is a very low figure as far as long- term stable development is concerned,” Mr. Litwack says. The memorandum notes that the current trends of economic growth may considerably diminish in the medium term if there is no clear vision of the country’s development goals in the higher echelons of power.
World Bank experts also point to the problem of large financial-industrial groups (FIG) that have close links to the government and are bringing pressure to bear on courts and regulatory bodies. “Some FIGs have become so strong that they are obstructing institutional development in Ukraine,” Mr. Litwack said. This raises the danger that this model of the “insider economy” based on informal relations may become an obstacle to Ukraine’s further development. According to Mr. Litwack, if the government dropped the “insider model,” it would really establish the supremacy of law as well as equitable and fair competition in business. This would boost trust in the government.
Mr. Litwack believes Ukraine is now at a crossroads: its future depends on the strategy it will choose. The World Bank is calling on Ukraine to follow the strategy of European choice and points out that, of all the CIS countries (including Russia), Ukraine has the best potential prerequisites for successful European integration. Following the European course would greatly help Ukraine to corner world markets and come closer to EU standards, the memorandum says.
Naturally, the presentation also broached the subject of national currency stability. “We think that the National Bank’s decision to peg the hryvnia to the dollar is based on monetary policy, and there are certain advantages to this. It began when there was little trust in the hryvnia, so this decision created a brisker demand for money. This demand is now growing in Ukraine faster than in any other country (except perhaps for China),” says Mark Davis, the World Bank’s senior economist. “This effectively increases trust in the country’s financial policy.” At the same time, Mr. Davis noted that pegging the hryvnia to the dollar was a “good policy” after the 1998 crisis, but now that “there are factors leading to the devaluation of the hryvnia,” one should be more flexible about the exchange rate. The hryvnia should be simultaneously pegged to several currencies, which will allow setting its true value. Mr. Davis thinks this should be done in good, rather than bad, times.
