Doing Business (or running a non-profit) in Ukraine

This article is from the English version of Ukrainska Pravda. It’s quite interesting. We face many of the problems described here at the UEC.

Original article in Ukrainian by Valentin Zelenyuk, for UP

According to a very comprehensive recent World Bank survey ‘Doing Business-2006’, Ukraine was ranked 124 out of 155 countries! (See Table 1.) This standing is substantially worse than that of most transitional and developing countries. In fact, among transitional countries only Uzbekistan was ranked worse than Ukraine, while such countries as Afghanistan, Belarus and Iraq were ranked higher!

Table 1. Ukraine’s Rating on Ease of Doing Business: among 155 Countries in the World

Criteria	Rank	Criteria	Rank
Starting a Business	110	Protecting Investors	141
Dealing with Licenses	98	Paying Taxes	151
Employing	119	Trading Across Borders	78
Registering Property	127	Enforcing Contracts	39
Getting Credit	75	Closing a Business	123
Overall Ease of Doing Business			124

Source: Extracted from www.doingbusiness.org (The World Bank).

To be specific, in terms of such basic issues as property rights registration, Ukraine, a country with a relatively high education level, was ranked only 127, which is below many countries in Africa! Another serious concern is the poor legal protection of investors (e.g., protection of minority shareholders against self-dealings by management), where Ukraine was ranked 141 (out of 155)—worse than any other transitional country and most developing countries. This very problem constitutes the main reason for poor development of the key market institution in Ukraine—the stock market.

Worst of all is the situation with the tax system, where Ukraine was ranked 151, only better than Belarus and three African countries! The World Bank estimates also suggest that the current level of taxation in Ukraine is very similar to that in other European and Asian countries: firms have to pay about 51% of their gross profit in taxes. Such a tax system does not favor attraction of foreign investors nor discourage local entrepreneurs from taking their businesses offshore. The major problem, however, is with the excessive tax bureaucracy: An average Ukrainian firm must make 84 payments and spend about 2,185 man-hours annually to comply with tax requirements, which is much more than in most countries. Such bureaucracy substantially reduces attractiveness of Ukraine for the new foreign investors and slows down the existing businesses, encouraging them to go into the shade. Such excessively burdensome taxation system is also the main reason for large shadow economy, which, by various estimates is about 50% of the official GDP.

Some positive signals can be also seen from the World Bank survey mentioned above. For example, Ukraine’s rating was very good for such issue as enforcing contracts (39), better than most transitional countries (including Russia, China, etc.) and even some developed countries (Italy and Portugal). Interestingly, it takes less time to resolve a dispute in Ukraine than in Bulgaria, the Czech Republic, Hungary and with much less court and attorney costs than in Russia, Slovenia and Kyrgyzstan.

Ukraine was also ranked relatively high on the issue of getting credit (75), better than Greece, Poland, Russia, etc. This positive sign is a reflection of the relatively well-developed banking industry in Ukraine, as enormous foreign investments that have recently been made in the banking sector might also suggest, and it should serve as an example for other industries in Ukraine. Ukraine is also ranked high for ease of trading across borders (78), which is mainly due to some recent progress toward entering the WTO. Moreover, comparing the World Bank surveys for the past several years, suggest that there is improvement in most of issues—however still very, very small.

Another country ranking, based on so-called ‘Economic Freedom Index’, constructed by The Heritage Foundation (USA), confirms the poor standing of Ukraine (ranked 99 out of 157!) relative to other countries, even poorly-developing ones. This rating assigned Ukraine to the worst group, ‘repressed economies’, in 1995-1996. Since 1997, Ukraine was assigned to the group of ‘mostly unfree’ economies, which is an improvement, but very, very small one, leaving us on the same level of business environment as in of business environment as in Lesotho, Nicaragua, Senegal, and other poorly developing countries.

Yet another country ranking, compiled in 2004 by Transparency International, placed Ukraine in 122nd place (out of 144) in terms of corruption (the higher the rank the higher is corruption). This puts Ukraine on the same level as such countries as Niger and Sudan but worse than Honduras, Zimbabwe, Belarus and many other poorly developing countries. In their latest study, in 2005, Ukraine made some improvements: we caught up with Honduras, Zimbabwe, and Belarus, now taking 107th place (out of 158). But is this where a country with relatively high education level should be like?

Summarizing our discussion above would actually help drafting the economic and political strategy for the new Ukrainian government—if it wants to achieve good and long-term economic growth for our Nation. The very first thing the government should do is to reduce the tax burden by simplifying procedures of tax payments and reducing the level of tax payments from businesses (mainly the profit tax, the value added tax, and the social security and pension tax, together with pension reform). The second most important objective is to simplify the business regulation procedures (especially the property registration and procedures for starting or closing business) and reduce government intervention in markets. Another specific step should be abolishing the Economic Code, while improving the Civil Code. The third most important objective the new government should pursue is to ensure that human rights and property rights (including that of minority shareholders) are secured and not violated. A particular step here would be to ensure that there will be no massive re-privatization and to promote further privatization.

Reaching success in the three cornerstones of national prosperity—ensuring peace, imposing easy taxes, and guaranteeing adequate administration of justice—would make Ukraine a prosperous, wealthy nation. This is not just a theory. The past century has given us excellent examples that this theory works well in practice. The best example is Hong Kong, which was one of the poor, developing nations in 1960s, but joined the club of the rich in the 1980s, having per capita income higher than many European countries! … The hope is that Ukraine will do it too!

Valentin Zelenyuk is a Senior Economist at Kyiv Economics Institute (KEI), visiting professor of EERC at Kyiv-Mohyla Academy, and the Director of Ukrainian Productivity and Efficiency Group (UPEG). Currently, he is a visiting Research Scholar at the Kennan Institute of the Woodrow Wilson International Center for Scholars in Washington, D.C., USA. Email: vzelenyuk@kei.org.ua