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How is Ukraine's Private Sector Performing?

Mohammad Amin's picture

Information on the situation prior to the outbreak of the crisis is critical for understanding the current situation in Ukraine. As far as economics is concerned, macro-economic data--such as income per capita and unemployment rates-- is definitely important but it does not necessarily capture various dimensions of the business climate and the actual experiences of private agents in dealing with the government. Other factors play a big role, for example, how often do firms pay bribes to obtain licenses and permits in Ukraine? Have these unofficial payments increased over time? In order to answer these questions, we must zero in on what actual firms really experience.

One such source of data is the World Bank Group’s Enterprise Surveys. These are firm-level surveys of a representative sample of an economy’s private sector. In collaboration with EBRD and as part of the Business Environment and Enterprise Performance Survey (BEEPS) project, Enterprise Surveys recently completed data collection in Ukraine and 28 other countries in Eastern Europe and Central Asia (ECA). The time period covered by the survey is 2012 for most variables and 2010 to 2012 for growth rates of sales, employment, and labor productivity. For benchmarking, a similar survey was conducted earlier in Ukraine covering the period from 2005 to 2007 for growth variables and 2007 for other variables. While in-depth research is required to fully understand if the worsening economic situation in Ukraine has contributed to its current crisis, few data points from the Enterprise Surveys’ County Highlights are worth highlighting.

First, there is clear evidence that economic activity by private firms was slowing down in Ukraine prior to the crisis. From 2010 to 2012, Ukrainian firms registered a negative growth in annual sales, employment and labor productivity. This is a contrast to positive growth, on average, in other ECA countries that were surveyed in 2013 and positive growth in Ukraine during 2005 to 2007. Figure 1 below illustrates the point.

Figure 1: Growth and labor productivity of private firms has worsened in Ukraine in the recent past

Source: Enterprise Surveys.
Note: Ukraine 2013 and ECA 2013 cover the period 2010 to 2012. Ukraine 2008 covers the period 2005 to 2007
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Second, the Enterprise Surveys data provide information on two separate corruption measures – Bribery Incidence and Bribery Depth. Bribery Incidence is defined as the percentage of firms facing at least one bribe payment request when engaging in six different transactions for public services, permits, or taxes. Bribery Depth measures the pervasiveness of corruption by computing for each firm the percentage of transactions in which bribes were requested or expected. As figure 2 shows, corruption was already high in Ukraine in 2007 by ECA standards and the situation has only worsened since then. These are by no means small movements and may have contributed to the current crisis.

Figure 2:  Corruption has increased in Ukraine in the recent past

Source: Enterprise Surveys.
Note: Ukraine 2013 and ECA 2013 cover the period 2012. Ukraine 2008 covers the period 2007.


Lastly, the broad message of worsening economic situation in Ukraine extends to the regulatory burden on the private firms even though there are pockets of improvement. For instance, Enterprise Surveys data show that the number of days it takes to obtain a construction permit decreased dramatically in Ukraine from 135 days in 2007 to a little over 1 day in 2012; and the same for operating licenses declined from 31 to 16 days. These are large improvements but limited in scope as far as the overall business climate is concerned. Enterprise Surveys data show that the percentage of senior management‘s time spent in dealing with business regulations – a measure of the overall regulatory burden on the private firms – has increased dramatically in Ukraine from 11.3 percent in 2007 to 19.5 percent in 2012. The corresponding figure in the rest of ECA in 2012 is much lower at 9.9 percent. 
 
We hope that the discussion above serves to highlight issues that businesses had experienced in recent years in Ukraine.