Policy Brief: Economic Assessment of Ukraine, 2007

Real GDP growth averaged an impressive 7.4% during 2000-06, as the economy bounced back from the severe transition recession of the 1990s, buoyed by rising terms of trade, strong investment growth and booming private consumption.

Yet there is more at work here than simply a post-crisis recovery supported by a benign external environment. The achievement of macroeconomic stabilisation together with the structural policies of the late 1990s did much to lay the basis for current growth, by hardening firms’ budget constraints and unleashing at last the Schumpeterian processes of creative destruction that drive economic development. Like many CIS countries, Ukraine has lagged the more advanced transition countries of Central Europe with respect to market-oriented reforms, as governments have often focused more on preventing structural change than facilitating it. Hence, there is much still to be done in order to make strong growth more sustainable. One of the major emphases of this report is therefore on what more
Ukraine can do to reduce the many remaining barriers to entry, exit and competition and thereby to stimulate a greater degree of dynamism and flexibility than its market economy has yet achieved. The potential benefits arising from such reforms are likely to be particularly great in view of the complementarities that exist among them, especially those involving regulatory reform, competition and privatisation. Improvements in the framework conditions for entrepreneurship will also be critical, not least in view of the need to increase private investment rates.

Tackling these issues is all the more urgent now because, although Ukraine continues to grow strongly and the scope for catch-up remains considerable, a number of the factors that have underpinned growth since 1999 have exhausted, or will soon exhaust, their potential.