Ukraine’s economy is surprisingly in good shape - for now

World

Despite continuing political uncertainty and few economic initiatives since the pro-democratic Orange Revolution of 2004, Ukraine’s economy is in surprisingly good shape - the International Herald Tribune reports.

Economists credit substantial inflows of foreign investment, a boom in consumer spending and a fairly disciplined monetary and fiscal policies. But as Ukraine prepares to join the WTO next year, experts say growth can only be sustained if the next government - which will be elected in 10 days - embarks on an ambitious economic agenda. “The past year has shown that the economy is less vulnerable to political crises than originally expected,” said Igor Burakovsky, director for Economic Research and Policy Consulting in Kiev. “But whoever wins the election cannot take it for granted that this growth will continue. It is an illusion to believe that reforms can be delayed and that the economy can continue to enjoy strong growth,” he added. “Too much time has already been wasted.”

The government action, economists say, should include investments in the infrastructure, including water, health services and energy. A fresh, more transparent start is also needed for the privatization process, which was all but stopped over the past year. Heavy industry will have to be restructured to cope with new competitive pressures expected once Ukraine joins the WTO. Efforts will also be needed to combat widespread corruption and strengthen the rule of law. These issues were neglected by both Viktor Yushchenko, the pro-Western president and leader of the Orange Revolution, and his political opponent, Viktor Yanukovich, who is prime minister and leader of the Party of the Regions, which is based in the country’s eastern industrial heartland. If anything, over the past year the political leadership has been spared any turbulence in the economy, which is expected to grow between 6% and 7%.

Vasily Astrov, economist at the Vienna Institute for International Economic Studies, said investments in fixed assets alone rose by nearly 33% during the first quarter of this year, compared with a year earlier. The inflow of foreign direct investment amounted to €4.1 billion, or $5.7 billion, compared with €1.3 billion in 2003. While that represents a remarkable increase by Ukrainian standards, it is paltry compared with its neighbor Poland, which joined the European Union in 2004. Foreign direct investment in Ukraine reached only $372 per capita in 2005 – “just over 16% of the corresponding figure for neighboring Poland,” according to Christian Gianella and William Tompson, authors of a study published last week by the Organization for Economic Cooperation and Development.

Furthermore, much of the investment was concentrated in the banking, services and retailing sectors and not in heavy industry, like steel, metallurgy and aluminum, which are commanding high prices on the world markets. “This sector could be the Achilles’ heel of the economy,” Burakovsky said. “Heavy industry needs foreign investors and foreign technological know-how to modernize the industry, make it less energy-intensive and prepare it for competition. This is happening, but only very, very slowly.” Industry has little time to adapt. Besides the competition that will flow from its WTO entry, Ukraine will soon have to pay more for its energy imports from Russia. Last year, the price of natural gas was raised to $95 per 1,000 cubic meters from $65. This year it rose to $130. “Next year’s price has not yet been agreed,” Burakovsky said.

So far, industry has not taken the steps required to deal with these two pressures, according to the OECD. “The economy is still dominated by energy-intensive heavy industrial sectors and this is one reason why so much past policy has been oriented towards averting rather than facilitating needed structural change,” Gianella and Tompson argue. Indeed, the governments elected since the Orange Revolution have done little to improve the investment climate. “There are high levels of legal, regulatory and policy uncertainty that make any long-term undertaking highly risky,” Gianella and Tompson write. That unpredictability stems in many cases from a lack of transparency that leads to corruption and undermines property rights. “Ukraine needs better regulation rather than simply less regulation,” they conclude.

So far, only Yulia Tymoshenko, one of the leaders of the Orange Revolution who has since founded her own party, the Tymoshenko Bloc, has made the economy an election issue. She has promised to make Ukraine a more hospitable country for foreign investors by making the laws and tax system more transparent. She has also criticized a recent and rare privatization deal: The sale of Dniproenergo, the largest power-producing thermal power generator, to Rinat Akhmetov, one of Ukraine’s richest men. He supports the Party of the Regions and is a longtime rival of Tymoshenko. “That privatization deal lacked all transparency and was politically motivated,” said Hryhoriy Nemyria, Tymoshenko’s political adviser. (iht.com)

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