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13.01.2009

Ukraine’s ranking drops in the 2009 Index of Economic Freedom

   

In spite of the economic crisis, the level of economic freedom is rising, according to the joint study produced annually by the Heritage Foundation and the Wall Street Newspaper. Out of almost 180 countries in the study, 83 showed progress towards greater economic freedom.  Ukraine, unfortunately, moved backwards, falling 2.2 points lower than last year to 48.8.

This score makes its economy the 152nd freest in the 2009 Index. Its score is 2.2 points lower than last year, reflecting deteriorating economic freedom in seven areas. Ukraine is ranked 42nd out of 43 countries in the Europe region, and its overall score is lower than the world average.

As an important exporter of minerals and grain, Ukraine has managed impressive levels of economic growth averaging about 7 percent over the past five years. Sustaining those levels in a time of global economic slowdown will require significant structural reform. In one such positive step, Ukraine became a member of the World Trade Organization in May 2008, completing a 14-year accession process.

In comparison to other countries that have been moving toward a more market-oriented economy, Ukraine lags behind in price liberalization and the efficiency of its business environment. The regulatory framework remains burdensome. While foreign investment is officially welcome, corruption and bureaucracy deter many investors. The judiciary does not always enforce contracts fairly and is tarnished with corruption, which also plagues the civil service. Bureaucratic inefficiency makes many commercial operations difficult.

 Environmental problems associated with the 1986 Chernobyl disaster remain unresolved. Promises of economic reform, better governance, and efforts to fight corruption after Ukraine’s 2004 ’Orange Revolution’ have not been fulfilled. Since December 2007, Prime Minister Yulia Tymoshenko and President Victor Yushchenko have been engaged in political infighting in preparation for the 2009 presidential race, once again neglecting reforms.

Business Freedom   40.5

The overall freedom to start, operate, and close a business is limited by Ukraine’s regulatory environment. Starting a business takes 27 days, compared to the world average of 38 days. Obtaining a business license takes more than the world average of 18 procedures and 225 days, and costs are high. Bankruptcy proceedings are time-consuming and costly.

Trade Freedom  84.0

Ukraine’s weighted average tariff rate was 3 percent in 2006. While Ukraine is making progress in liberalizing its trade regime, some export restrictions, services market access barriers, import taxes and fees, some import licensing requirements, restrictive sanitary and phytosanitary regulations, complex standards and certification regulations, non-transparent government procurement, and weak enforcement of intellectual property rights add to the cost of trade. Ten points were deducted from Ukraine’s trade freedom score to account for non-tariff barriers.

Fiscal Freedom  77.0

Ukraine has low tax rates. The top income tax rate is 15 percent, and the standard corporate tax rate is 25 percent. Insurance companies are subject to a specialized rate. Other taxes include a value-added tax (VAT), a land tax, and an inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 38.1 percent.

Government Size  39.0

Total government expenditures, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 45.1 percent of GDP. Despite widespread privatization, the economy remains shackled by government intervention in the private sector. Privatization of the telecommunications sector continues to be delayed.

Monetary Freedom  68.1

Inflation is high, averaging 12 percent between 2005 and 2007. The executive branch can establish high minimum prices for goods and services, and the government influences prices through regulation and state-owned enterprises and utilities. Ten points were deducted from Ukraine’s monetary freedom score to account for policies that distort domestic prices.

Investment Freedom  30.0

The laws provide equal treatment for foreign investors, but certain sectors are restricted or barred. Complex and burdensome regulations and corruption are the primary deterrents to investment. Additionally, contracts are not always upheld by the legal system. Resident and non-resident foreign exchange accounts are subject to restrictions and government approval in some cases. Payments and transfers are subject to various requirements and quantitative limits. Some capital transactions are subject to controls and licenses. Foreign investors may not own farmland.

Financial Freedom  40.0

Ukraine’s financial system remains weak. The restructuring of the banking sector has proceeded slowly, and about 150 small banks suffer from insufficient capital. Two banks are state-owned, and the 10 largest banks account for over half of net assets. Following the amendments on banking activity passed by the Ukrainian Parliament in 2006 and the country’s accession to the World Trade Organization in May 2008, foreign banks and insurance companies are permitted to open branch offices. Underdeveloped capital markets are poorly regulated. Shoddy corporate governance weakens stock market transparency.

Property Rights  30.0

Protection of property is weak. The judiciary is subject to executive branch and criminal pressure, and corruption is significant. Contracts are not well enforced, and expropriation is possible. A number of initiatives to develop a mortgage market have resulted in a strong increase in the number of mortgages and have laid the legislative and administrative groundwork for a functioning real estate market.

Freedom from Corruption  27.0

Corruption is perceived as widespread. Ukraine ranks 118th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2007. Corruption pervades all levels of society and government and all spheres of economic activity and is a major obstacle to foreign investment. Low public-sector salaries fuel corruption in local administrative bodies such as the highway police and tax administration, as well as in the education system.

Labor Freedom  52.4

Ukraine’s relatively rigid labour regulations hinder overall employment and productivity growth. The non-salary cost of employing a worker is very high, and the difficulty of firing workers creates disincentives for additional hiring.

The material this is taken from can be found in full at: http://www.heritage.org/index/Country/Ukraine#

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