Wednesday, 23 January

By creating a system of governance and legal system, Ukraine could receive over $ 8,5 billion of additional profit each year and significantly accelerate economic growth. This is evidenced by the results of a study by the Center for Economic Strategy “How much budget is losing because of the ineffective management of the country?”

The researchers attempted to calculate how much Ukraine loses its funds because it has not yet managed to put in order certain issues and has not secured adequate legal protection for both its own interests as well as investors. The results are really impressive, because we are losing the resource that can actually be obtained and used to develop the state, in times, when the state is in great need of additional money.

The Ukrainian authorities sincerely rejoice at the next loans that they manage to attract both from international financial organizations and from private creditors. However, as a result, the debt burden on public finances only grows, while almost all attracted funds go either to pay back previous loans or to finance the state budget deficit. This explains why, despite the huge volumes of loans, the state’s economy is growing very slowly ‒ by about 3% in 2018 and, according to the NBU expectations, 2.5% in 2019.

To accelerate economic growth, we need investments, additional funds that would stimulate its development. But an investor must clearly understand the conditions on which he invests his own funds in one or another economy, have certain guarantees of their safety and multiplication, confidence that the “rules of the game” will not change constantly and not predictably.

According to the study, for example, the introduction of a transparent market for agricultural land would allow Ukraine once, after the opening of the market, to attract about $ 12.4 billion, and then receive more than $ 50 million in revenue annually. The discussions on this issue still do not subside, and despite the declarations of the authorities about the intentions to carry out land reform, we see no attempts to at least prepare the market for the opening, creating the necessary legislative base and fuses that would protect the owners of shares. And the Parliament from year to year continues the action of the moratorium, arguing it is precisely the unreadiness of the legal framework.

About $ 10 billion more could be obtained by the state in the process of recovering debts of borrowers, who did not service their loans in banks. Now, if we are talking about banks that are in the process of liquidation, and there are plenty of them, the Fund for Guaranteeing Individuals is responsible for returning borrowers’ funds, since it was the fund, who reimbursed his lost deposits to customers of these banks and must at least somehow compensate the state for these expenses. In countries with developed systems of legal protection of creditors, with every dollar of unpaid credit, it is possible to return up to 70 cents. In Ukraine, where borrowers, through artificial bankruptcies and dubious court decisions, can avoid collecting debts, from each hryvnia of an unpaid loan, at best, you can get back 30 kopecks. The solution to this problem also lies exclusively in the legal field, but the state, even after a powerful banking crisis, has never tried to resolve this issue.

Also, the state could receive an additional billion dollars annually, if it were developing public-private partnership in infrastructure projects that can still be counted on the fingers of one hand and not one has ended yet. There is a demand for business to cooperate with the state; there is only a lack of confidence that the state will fulfill its part, because the practice, when multi-year projects are financed with delays or are completely deprived of funds, after the next budget revision is still common in Ukraine.

The start of privatization would have helped the state a lot. But so far, on the one hand, due to the insecurity of investors in Ukraine, and on the other, due to the unwillingness of the ruling elites to lose control over state-owned companies, privatization is planned to be hampered at the highest level. During the time, which in most cases is spent only on talking about the next privatization start, the objects of the state only lose their value, they increase losses and debentures, therefore they become even less attractive to Western investors. A year ago, the lack of success was explained by the need for new legislation, but it is already there, and the “big” privatization has not moved yet, causing another “hole” in the state budget.

But most of all, according to the analysts, the state loses from the shadowing of wages. Every year, Ukraine does not receive about $ 6 billion due to the existence of tax evasion schemes for labor. Mistrust of the state, poor quality of public services and low expected pension, combined with weak control by law enforcement agencies, have become the medium of “gray” and “black” wages. As a result, the central and local budgets annually lose about 2.8 billion dollars ‒ single social contribution and 3.2 billion dollars ‒ personal income tax.

It is clear that it is impossible to completely legalize informal work, this phenomenon is common even in very developed countries. In Ukraine, the fight against shadow employment is further complicated by a number of additional factors: lack of formal jobs; lack of proper control by law enforcement agencies; the possibility of minimizing taxes without any serious threat of punishment; low trust in the Government and low quality of public services; tough labor laws; the complexity of the registration procedures and the like. But the state can and should take certain measures. And the first thing that needs to be done is to strengthen trust in the Government institutions and improve the quality of public services, to keep promises to index pensions in order to increase trust in the solidary pension system. So that citizens clearly see the connection between the level of official income and pension payments, and they themselves were interested in receiving “white” incomes. Moreover, the state must redistribute the responsibility of the employer and employee for the physical process of paying taxes and social contributions to the worker’s benefit and reform the social assistance system, so as to reduce the opportunities to hide income levels. And, of course, to improve the quality of work of the tax service and administration.

In order to receive all these additional benefits, neither radical reforms, nor new economic programs are needed — only pinpoint changes to the current legislation, its unquestioning implementation, and close control by the authorities.

Traditional economic thought is in the position that the relationship of ownership and economic growth is quite strong in most countries. Investments in economies of countries with weak proprietary rights are less, and the level of corruption in such countries, on the contrary, is higher. Moreover, corruption not only hinders fair competition and slows down the development of business in the state, it also significantly reduces the efficiency of government spending and the quality of public services, ultimately leading to increased corruption itself. And Ukraine just needs to break out of this vicious circle.

What is interesting is that the strengthening of the rule of law in the state indirectly affects its debt burden, because rating agencies, determining the country’s creditworthiness, use management indicators as one of the key indicators of sustainability. States with better rule of law receive higher credit ratings and, accordingly, more attractive interest rates on loans. For Ukraine, which now receives loans from private investors at 9 percent or more per annum, this is very important. But so far, we have nothing to brag about. According to the “Rule of Law” index of WJP, Ukraine ranks 77th out of 113 countries. In terms of the WGI’s “Rule of Law” indicator, Ukraine is ranked 160th among 209 countries. According to the Corruption Perceptions Index (CPI), Ukraine is ranked 110th among 180 countries. And in terms of the “Control over Corruption” indicator of the same WGI, Ukraine ranks 168th among 209 countries. Raising Ukraine in these ratings would improve its overall sovereign performance and we would not have to pay such high interest rates to attract regular loans from private lenders.

The low level of the rule of law rights and the high level of corruption are also the sources of the other state misfortune ‒ the shadow economy. Its volume is quite difficult to determine, but even according to optimistic calculations, now the “shadow” is about 30% of the official GDP of the state, and according to pessimistic calculations ‒ more than 45% of GDP. In fact, this is a very high level. For comparison, in the countries of Central and Eastern Europe, the average level of the shadow economy is about 24%. These countries are not only our neighbors, but also our competitors in the investment markets. Accordingly, at this time, in this competitive struggle, even with other peers, we simply cannot win, because investors are inclined to invest in less shadowy economies and avoid cooperation with countries, where investment risks are higher.

By Valentyna Yushchenko

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