In early July, Standard & Poors rating agency stated that Ukraine suffers from budget deficit and lack of foreign investments more than most of other developing countries. The agency believes that the lion’s share of our problems is the result of unfavorable investment climate and unpredictability of the government’s economic initiatives. The same day the Ukrainian Parliament adopted several economic laws, including the introduction of treasury bills, transfer pricing, and ecology tax (see last Investgazeta).
This hastiness in changing game rules has fed the worst fears of foreign investors, who are not in a hurry to invest in the Ukrainian economy anyway. Too many people in the West tend to believe that Kyiv lacks long-term vision and a dialogue between the government and the business.
During last year’s Davos meeting upon Kyiv’s request, experts of the World Economic Forum set out to develop the strategy of Ukraine’s development. At this point, the process is in its full swing, and its final results are to be presented in January 2014. In essence, this document will summarize the WEF’s recommendations for the Ukrainian government, with an emphasis on priorities: which steps should be taken and which reforms introduced first.
The WEF has already developed similar strategies for many countries. However, all of them have a weak point: the government in question may either follow the recommendations or ignore them. The Forum’s latest achievement, published in January 2013, was a draft of economic scenarios for Russia. Russia’s Ministry of Economy has announced that it began to fulfill the steps outlined by Swiss experts.
What are the biggest challenges of Ukraine’s economy and the prerequisites of a long-term dialogue between the government and the business? Investgazeta asked Stephan Mergenthaler, associate director for Strategic Foresight with the World Economic Forum, who visited Kyiv on the invitation from the Foundation for Effective Governance.
You are one of the authors of the scenarios which the WEF is drafting for Ukraine’s economic development. In your opinion, what are the main problems of our economy?
The most important economic challenges for Ukraine fall into several categories. Firstly, your country must improve the investment and business climate. Many sectors may become very perspective, particularly agroindustry, energy and machine-building. But to make this happen, you should increase the productiveness, which is impossible without investments.
The second challenge is to improve the performance of the public sector. You have to strengthen ties between the government and the business. This is directly linked to the growth of productivity and the country’s better ratings. For example, Ukraine currently occupies the 73rd position among 140 countries in our Global Competitiveness Report, but if we look at the performance of the public sector, your position is much worse. That is why the reliable and predictable performance of the public sector is one of the key elements of good business climate in the country.
Foreign businessmen and investors look for stability and predictability in Ukraine. The latter is true for local businessmen as well. Also, in my opinion, businessmen expect a dialogue with the government in developing a long-term strategy in economy and investment. Look at Malaysia’s example. Since this country created the conditions for a dialogue between the government and the business, it has shown good economic results.
The third challenge is the market of high-quality labor force. Countries with qualified personnel are steadily climbing up the ratings.
You mentioned agroindustry along with energy and engineering as priority sectors. Wouldn’t the development of this sector increases our dependence on raw materials?
If the market is growing and businessmen see its high profitability, this sector will grow rapidly. You shouldn’t worry about skewing the economy for raw materials. Agroindustry spurs a great number of local industries, which include infrastructural projects, machine-building and chemical industry. What important is the country’s innovation potential on this traditional market.
In your opinion, what is the obstacle for necessary reforms in Ukraine: lack of political will or objective consequences of the economic crisis?
One of the common features of all former Soviet countries is that politics influences economy too much and may seriously hinder the launch of vitally important reforms. I should say that this struggle pushes Ukraine to the outskirts of the global economy even in those fields where it could have been a leader – for example, in the same agroindustry we talked about.
In my opinion, Ukraine should concentrate on practical things, such as bringing up the generation of young and talented people. This is the issue not only for education, but for general policy, which should facilitate the return of Ukrainian talents back to the country.
You should realize that in the future only those countries will prosper which can make innovations in all sectors of their economies. I mean this is not the question of IT developing. One should look for new approaches in traditional sectors as well.
Investors see the current Ukrainian government as too inconsistent and unpredictable. Is this your view of the situation, too?
During my visit in Kyiv I spoke much about it with Ukrainian businessmen. They expect more predictability of their government: the long-term vision of the economy’s development and its consistent practical realization. It is the successful and consistent realization of plans which makes the effect of predictability.
Doubtless, there is no single solution to all existing problems. You need an entire complex of reforms, beginning with legislation. There are certain regions in Ukraine which successfully improve their business conditions. The same should be made on the national scale, in all economic sectors.
The Ukrainian government adopted different concepts of the country’s development, but none was properly implemented. Don’t you think the WEF’s document will have the same fate?
I can’t comment on the actions of the Ukrainian government. But I must say political will is essential for these decisions. Otherwise the authorities will not be ready to widely discuss the strategies with the public and business. I’m working with the governments of many countries, drafting long-term strategies for their economies’ development, and very often different players have different (and sometimes opposite) opinions about the problems and their solutions.
We often have consultations about this. That is why I firmly believe that the implementation of reforms demands that the government and the business share views about the things that must be done.
What executive bodies you deal with in Ukraine?
The WEF tries to work with different social groups, business communities and the government. During the first stage of drafting this kind of documents, we consult with people who make decisions for the country’s economic policy. We negotiated with the President’s administration, vice premiers and ministers responsible for energy, agriculture and education. We sought opinions of businessmen and civil activists.
We are now holding a series of seminars and debates with the goal of explaining the importance of long-term economic programs and a dialogue of the government and the business to public servants. In Ukraine, this process will last for twelve months. It began in Davos at the initiative of President Yanukovych, and we will try to complete it in Kyiv on November 6. After that we will develop the final scenarios. By next year’s summit in Davos we will have a report on development strategies. But even then the work will not be done; consultations on reforms are as important for us as the final report. During this discussion we will shape the understanding of the dialogue between the government and the business. We already had the situation with Russia when the publication of the report in Davos triggered the discussion between Prime Minister Dmitry Medvedev and the European business. Today the Russian Federation is getting ready to implement several reforms based on our findings and expertise. We would like to open the discussion on future economic scenarios and reforms after publishing the report on Ukraine, too.