How Can Ukraine Overcome Its Economic Decline And Sustain Growth?

  • 5/14/15 4:53 PM

This was the core question the participants of the Free Market Road Show sought to answer. It has already been the fourth conference held in Kiev within the framework of the 8th international annual tour.

Traditionally, the 8th Annual FMRS was initiated and organized by the Austrian Economics Center (AEC), in cooperation with over 60 leading think-tanks and universities across Europe and the Caucasus, and in association with international partners such as the Liberty Fund, Global Philanthropic Trust, European Students for Liberty, Ruefa and the F.A. v. Hayek Institute. The tour started on April 13th and finishes on May 27th covering 35 cities in Europe and Caucasus – from Scandinavia to Turkey, from Spain to the Ukraine. It’s worth mentioning that since 2008 when the first FMRS was launched the number of participating countries and experts has been steadily increasing.

The 2015 Free Market Road Show brought together leading business people, outstanding scholars and students, opinion leaders, policy experts, elected officials, diplomats and other interested parties from across Europe to discuss the current Euro-zone crisis, explore what kind of Europe people want, examine the ‘conundrum’ in which the European Union finds itself in and discuss ways to turn the current crisis into an opportunity. In the Balkan countries the panelists additionally focused on corruption and how to best fight it, whereas in the Caucasus regions the current tensions were covered, focusing on how economic freedom, the rule of law and protection of property rights provides options for improvements.

This year’s discussion “How to Create Growth?” in Kiev has traditionally united leading international and Ukrainian experts in economics, law, finance, business and civil society, representatives of diplomatic missions, academics and journalists.

The conference was opened by the President of the Taxpayers Association of Ukraine Vasyl Matiychyk; the Executive Director of the FMRS Tour, Director of the Austrian Economic Center Dr. Barbara Kolm; and Commercial Attaché of the Austrian Embassy in Kiev Siegfried Weidlich. In his welcome address Mr Matiychyk pointed out that it’s the fourth year in a row that the Taxpayers Association is in charge of the FMRS conference in Ukraine. He emphasized that it’s his pleasure to contribute to the organization of this event as currently it is of a very high importance and necessity for the country. It provides a unique opportunity to collect the ideas of experts from different countries and to mold them into high caliber recommendations which could potentially contribute to the progress of Ukrainian reforms.

The conference included two discussion panels. The first panel “Robust Recovery or Decline? Wartime Reforms in Ukraine” was aimed to touch upon the issues of the economic future of Ukraine. What are the reforms declared by the government? What recipe does Ukraine need to overcome a decline? What results should Ukrainians expect from decentralization? Should Ukraine raise tariffs and reduce subsidies, or optimize costs, sending them where they will be of the best returns? Such discussion was initiated as two years ago experts diagnosed chronic recession in Ukraine. Today, in terms of deep financial, economic crisis, military intervention, the economic forecasts for Ukraine are disappointing. According to the rates of falling, the state is overtaking 1990. In 2014, the GDP dropped at about 7%. Economic growth will bring higher standards of living and the elimination of the remaining pockets of poverty. But do Ukrainians and their political elites in particular have necessary tools to achieve positive economic results?

Columnist of The Wall Street Journal John Fund and the President of the Fraser Institute Michael Walker shared an idea that lots of Ukrainians don’t clearly understand the idea of the international loans and conditions of reforming. Credits are allowed to implement necessary reforms which would contribute to the improvement of a particular branch of economy. It’s absolutely wrong to consider that reforms are done in order to get the next loan. On top of this, it is incorrect to complaint about the lack of resources. The most important resource is a human potential, creativity and a strong will to make a change today.

In support of these arguments, the economist from the organization “CASE Ukraine” Volodymyr Dubrovskyi added that primarily Ukraine needs to reform its taxation and regulatory systems. Such reforms do not demand extra resources; however they might successfully fight corruption. It is the corruption that causes the biggest problems and obstacles to stability and progress of the national economy.

The Member of the Ukrainian Parliament, Chairman of the Committee of the Verkhovna Rada of Ukraine on Industrial Policy and Entrepreneurship Victor Galasyuk distinguishes 3 main priorities which, according to him, might have a positive effect on the economy. Firstly, it is the anti-corruption reform together with the reform of the system of public administration. They are interconnected as it is next to impossible to overcome corruption without profound changes in the structure and functioning of the government institutions. Secondly, it is important to decrease the critical energy dependence of Ukraine. As for today, the energetic efficiency of the country is 3 times less than the efficiency of the European countries. In order to improve this sector of economy it is worth to attract investments. And thirdly, Ukraine needs a new economic policy that will target the GDP growth, but not just keeping inflation in check as it happens at present.

The distinguished Professor of Economics, History and English from the University of Illinois Deirdre McCloskey sees a huge potential of the Ukrainian economy. She believes that creation of favorable conditions for entrepreneurship can become an important step forward and stimulate growth.

The discussion resulted in some conclusions and the panelists determined the main “enemies” of reforms in Ukraine. They are corruption, energetic dependence, debt commitments, absence of the dialogue between government and civil society, etc.

The second Panel “Limits of Tax Liberalization under Severe Fiscal Constraints” was aimed to decide if there are any extents to which Ukraine can raise taxes and change the structure of taxation not causing the downturn in economic activity of the country. The task of fiscal consolidation is usually solved by reducing expenditure. Then simultaneous reduction of the tax burden can run processes of economic recovery, and the corresponding increase in revenues will offset the economic losses. However, Ukraine found itself in a situation where fiscal consolidation is slowed by mandatory expenditures, including the necessity for funding the military defense and inability to significant reduction in social spending as it can lead to the general trend of poverty. So partially, the advancement of the public sector is forced by increasing taxes.

The Vice-President of the Taxpayers Association and the former Minister of Finance of Ukraine Oleksandr Shlapak gave his positive estimate to the ongoing taxation reform in Ukraine. According to him despite some negative aspects and mistakes, this reform will have its positive results in the near future. Unfortunately, similar progress is absent in the reforming of the taxation agencies and they continue to perform their functions improperly. The relations of taxpayers and revenue authorities remain extremely tense.

The founder of the company “Geopolitical Information Service”Prince Michael von Liechtenstein, CEO of the “John Chisholm Ventures” John Chisholm, and Director of the Austrian Economics Center Barbara Kolm made several examples of the progressive economic development. They mentioned the cases of the USA, the Great Britain, Hong Kong, and Singapore. Barbara Kolm believes that Ukraine has enough potential to reach the same results as they did in Singapore 50 years ago. According to her, introduction of the special economic areas and simplification of the taxation system can contribute to the development of the country’s economy.

The Assistant Professor, Political Economy Research Fellow of the Free Market Institute Adam Martin, USA, in his speech pointed out that international loans will not safe Ukraine from the financial crisis, at the same time they have very negative consequences for the next generations. He emphasizes that it is important to primarily fight the corruption in the country.

The President of the Group of Companies "Slobozhanska Building Ceramics" Ihor Dalichuk told about the real state of affairs of the Ukrainian business. He pointed out some important issues on entrepreneurship and presented detailed analyses of the problems in regulatory, investment, taxation and operational areas. He argues that first of all the taxation reform in Ukraine should stimulate investments and to create favorable conditions for business activities.

The participants concluded that the most urgent tasks for Ukraine at the moment are: to establish the rule of law; to fight corruption; to simplify the system of taxation which should become transparent and clear. Creativity in problem solving, personal freedoms, respectful relations and partnership of civil society, government and business is the key to overcome the financial and economic crisis and to sustain further economic development of the country.

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