Ukraine trailing all European countries in economic freedom ratings
According to the 2011 Index of Economic Freedom published by the
, Ukraine has the worst rating of 43 countries in Europe and is in 164th place out of 179 countries. Its figures have been getting worse for several years in a row.
The Index is made up of ten components of economic freedom, with each assigned a grade using a scale from 0 to 100, where 100 represents the maximum freedom. The ten component scores are then averaged to give an overall economic freedom score for each country. The ten components of economic freedom are:
The following is the country page for Ukraine
Overall Score: 45.8 World Rank: 164
Ten Economic Freedoms of Ukraine
Ukraine’s economic freedom score is 45.8, making its economy the 164th freest in the 2011 Index. Its score is 0.6 point lower than last year, primarily because of declines in government spending and freedom from corruption. Ukraine is ranked last out of 43 countries in the Europe region, and its overall score is lower than the world average.
The global economic downturn has erased the gains of years of economic growth. Significant structural reforms included competitive tax rates and membership in the World Trade Organization after a 14-year accession process. With export growth facilitated by these earlier reforms, Ukraine has gradually returned to the path of economic growth since mid-2010.
Nonetheless, structural constraints and political instability continue to undermine private-sector development. State intervention and the ongoing threat of expropriation limit dynamic economic activity. Ukraine’s underdeveloped financial sector struggles to provide the necessary credit for private-sector development, while the regulatory environment remains opaque and burdensome. Recent large fiscal deficits have strained public finances, forcing Ukraine to confront the challenge of restoring sustainable levels of public spending.
Ukraine has been independent since the collapse of the Soviet Union in 1991. In January 2010, Victor Yanukovych of the Party of Regions was elected the country’s fifth president. Since gaining power, Yanukovych has fast-tracked rapprochement with Russia. The government has extended Russia’s Black Sea Fleet’s lease for 25 years from 2017 in exchange for discounted Russian gas, currently worth over $3 billion a year, and parliament has rejected ambitions to join NATO. Ukraine has well-developed industry, rich agricultural lands, and significant natural resources. It is an important route for oil and gas exports from Russia to Western Europe. The recent economic crisis triggered a significant recession, and GDP contracted by 15 percent in 2009. Ukraine has joined the World Trade Organization and the European Union’s Eastern Partnership.
Despite progress in regulatory reform, lingering complexity often creates uncertainty in commercial transactions. Overall, the inefficient regulatory framework imposes a significant burden on private enterprise.
Ukraine’s weighted average tariff rate was 2.4 percent in 2009. Some export restrictions, services market access barriers, import taxes and fees, import licensing requirements, non-transparent government procurement, complex standards and certification regulations, and weak enforcement of intellectual property rights add to the cost of trade. Customs procedures are improved but can still result in questionable customs valuation. Ten points were deducted from Ukraine’s trade freedom score to account for non-tariff barriers.
Ukraine has relatively low tax rates. The standard income tax rate is 15 percent (gambling income is subject to a 30 percent rate), and the standard corporate tax rate is 25 percent. Insurance companies and agriculture profits are subject to lower rates. Other taxes include a value-added tax (VAT), a property tax, and an inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 37.7 percent.
In the most recent year, total government expenditures, including consumption and transfer payments, increased to 47.3 percent of GDP. The poorly managed state-owned gas company, Naftogaz, is a drag on the fiscal balance and a threat to overall stability.
Inflation has been extremely high, averaging 17.9 percent between 2007 and 2009. The executive branch can set 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 measures that distort domestic prices.
Ukraine’s bureaucratic legal and regulatory requirements discourage foreign investment. The law provides equal treatment for foreign and domestic investors in most sectors of the economy. Contracts are not always upheld by the legal system, and privatization has slowed. Resident and non-resident foreign exchange accounts may be subject to restrictions and government approval. 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.
Ukraine’s financial system is underdeveloped, and the country remains primarily a cash-based economy. Restructuring of banking has proceeded slowly, and the more than 150 small banks often suffer from insufficient capital. Foreign banks and insurance companies are permitted to open branch offices. Over 180 banks are currently registered, including 49 with foreign equity participation. Reflecting the lack of efficiency and depth in the financial system, the development of a domestic capital market is still at a rudimentary stage. A liquidity crisis and an increase in non-performing loans related to the global financial crisis have led to a large bailout package from the International Monetary Fund. The government has also taken controlling stakes in three of five banks in financial trouble. Legislative changes in late 2009 have required conversion of foreign currency investments into local currency and undermined the free flow of capital.
Protection of property rights 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. 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. Ukraine is a major transshipment point, storage location, and market for illegal optical media produced in Russia and elsewhere.
Corruption is perceived as widespread. Ukraine ranks 146th out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009, a sharp drop for the second year in a row. 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 such local bodies as the highway police and tax administration, as well as in the education system.
Ukraine’s labor codes remain outdated and inadequate. The non-salary cost of employing a worker is very high, and dismissing an employee is difficult. More modern regulations have been under consideration, but they have not been implemented.