DEVELOPMENT CHALLENGES
Ukraine gained its independence in 1991 and, since then, has undertaken reforms and modernization in its transition towards a market economy. Although real GDP declined in the 1990s, it began growing by 6.9% annually on average between 2000 and 2008, due primarily to strong export growth. Ukraine is classified as “lower-middle” income country and has a “high” Human Development Index (HDI) of 0.729. It is ranked 76th of 187 countries. However, Ukraine was strongly affected by the financial crisis, experiencing a 15.1% drop in GDP in 2009 and a considerable worsening of its GNI per capita, which decreased from US$3,210 in 2008 to US$2,840 in 2009. While per capita GNI has increased to US$3,000 in 2010, the country still faces several important challenges for development.
Poverty and inequality
The proportion of the population living below the minimum level of subsistence has decreased from 55% in 2005 to 16.1% in 2010, and extreme poverty has decreased from 9% of the population to 3.5% over the period 2005-2009. Despite this progress, higher wealth disparity has occurred: there is a growing gap between urban and rural living standards, as well among regions. Vulnerable population groups, in particular children and families with children, are subject to unfair distribution of resources and inaccessibility of resources. Emigration has been used as a coping mechanism for poverty, and remittances sent by migrant workers to their families are often the major or only source of income for large parts of the Ukrainian population.
Underemployment and a large informal sector
Official unemployment has been decreasing since 2000 (from 11.6% to 6.4% in 2008) but again rose to 8.8% in 2009, as a result of the economic crisis. Underemployment in the form of reduced working hours and administrative leave, usually without pay, and the non-payment of wages also increased. 3.6% of workers in Ukraine were put on administrative leave and 10.3% on a reduced work regime in mid-2009, while the volume of unpaid wages grew by 38%. In order to cope with rising underemployment and income loss, Ukrainians have turned to the informal economy, which represents nearly 50% of GDP by some estimates (Andreas Bühn & Friedrich Schneider, 2011), the third highest share among 25 transition economies, after Georgia and Azerbaijan. However, working conditions in the informal economy are generally poor, and there is little or no social protection.
Labour and skills shortages
Ukraine has achieved universal adult literacy, 85% of the population aged 25-64 has at least secondary education, and tertiary education enrolment and completion rates have attained 80%. Yet primary enrolment rates have fallen from 94% in 2000 to 89% in 2008. The same can be said for secondary school enrolment and completion rates. In addition, even though Ukraine spends over 7% of its GDP on education, the quality of education has been worsening due to a lack of investment, mostly in rural areas. This has led to a shortage of qualified personnel and equipment. Materials and curricula are outdated for modern job markets, causing a mismatch between graduates’ skills and employers’ requirements. There is also a general trend towards “brain waste”, reflecting the growing imbalance between the number of educated specialists and demand for them in the labour market. Over-qualification also encourages emigration of the skilled labour force, which, coupled with depopulation, has led to a shortage of adequate labour.
Inefficient public administration
The country’s state apparatus is not very efficient and its public administration system requires modernization and reform. Despite some progress towards decentralization, there is a lack of clear mandates and division of responsibilities for social service delivery at different levels of governance. District and municipal authorities lack the capacity to plan and implement local development strategies, thus failing to address unfavourable social trends and contributing to social exclusion and inequality. Moreover, a high level of politicization in the administration indicates that there is insufficient separation of political and administrative functions, resulting in a high level of rent-seeking behaviour that produces uncertainties in the business environment.
KEY TRADE ISSUES
Weak competitiveness, low productive capacity and export concentration
The range of Ukraine’s internationally competitive products is small, and their value-added is low, due to the weak productive capacity of enterprises. The structure of Ukraine’s exports is highly concentrated on semi-finished, low value-added goods, which accounted for 68.6% of total exports in 2009. Of these exports, ferrous metals and metal products comprised 40%. The second largest export group is agriculture: Ukraine is the world’s third largest exporter of grains. The country is also one of the largest energy transit countries.
Market concentration and trade deficit
Although Ukraine is highly integrated into world markets and has been a WTO member since 2008, it has a small number of trading partners, mainly in the CIS and EU. In 2010, CIS countries accounted for 33.9% of Ukrainian commodity exports, whereas the EU’s share was 23.9%. Reflected in the 40.3% dip in merchandise exports during the financial crisis, the concentration of its economy makes Ukraine highly sensitive to changes in global market conditions, exchange rates and trends in the economic development of partner countries. In fact, the drop in the country’s low value-added exports, along with its high dependence on energy imports, has contributed to a widening of its trade deficit.
Limited access to finance
Prior to the financial crisis, companies in Ukraine benefited from a growing lending market, with domestic credit reaching 76.9% of GDP in 2009. However, with the onset of the crisis, access to finance became more difficult, especially for SMEs. High interest rates and collateral requirements, underdeveloped start-up financing, and inadequate guarantee schemes are among the factors that limit access to credit. A similar trend occurred with foreign direct investment (FDI): starting in 2001, Ukraine attracted above-average FDI inflows given its proximity to the EU market and the considerable size of its domestic market; however, FDI inflows decreased dramatically with the financial crisis, dropping to only 5% of GDP in 2010.
Deteriorating physical infrastructure
Ukraine is positioned at the intersection of many international transit corridors and is thus a key link between its neighbours. Transport therefore has an important role to play, but despite the high degree of coverage, the quality of the transport infrastructure is low, many facilities are deteriorating, and existing infrastructure does not match international standards (for example, Ukrainian railway tracks are wider than the European standard). Prices for transport services also remain relatively high. As a result, poor infrastructure has prevented Ukraine from capitalizing on its strategic trade location.
Cumbersome regulations and customs procedures
Businesses, mainly SMEs, are burdened by a complex and unpredictable regulatory environment in Ukraine, which in 2012 was in 152nd place (of 183 economies) on the World Bank’s “ease of doing business” indicator. In terms of trading across borders, Ukraine is in 140th position due to its high non-tariff barriers in the fields of licensing, obtaining permits and certificates of conformity, and undergoing sanitary-epidemiological, phytosanitary and veterinary control. Improper implementation of, and lack of compliance with, laws comprises another obstacle. The customs clearance process is also slow, complicated and unpredictable.
Statistics have been compiled by the World Bank, OECD and UNECE. Information has been adopted from: the 2010 United Nations System Common Country Analysis for Ukraine; the 2010 United Nations report on “The MDGs in Europe and Central Asia: Achievements, Challenges and the Way Forward”; the 2011 UNDP Aid for Trade Review for Ukraine: Trade and Human Development; and the 2011 OECD book on Development in Europe and South Caucasus: Armenia, Azerbaijan, Georgia, Republic of Moldova and Ukraine.