Experts have been lining up give advice to the new President on how to reform the economy and even more. Still, all their solutions either relate to non-priority areas or look like political suicide.

One of the first documents signed by Viktor Yanukovich as the President of Ukraine was the Decree setting up a Committee on Economic Reform. The Committee must quickly develop a national strategy for reform; determine the priorities, leverages and areas of the reform. In fact, by signing the document the President admits that so far his team has not developed any specific action plan and it is still to be produced. The election agenda of Yanukovich was compiled in line with the best Ukrainian traditions and could hardly be regarded seriously. In their turn, both national and international experts immediately put their best foot forward and created several priority changes programs.

NOT A SINGLE WORD ABOUT THE SOCIAL REFORM

The priorities set by the Foundation for Effective Governance can be surely considered as the most realistic from the point of their implementation. Their feasibility is based on the fact that the Foundation was founded by Rinat Akhmetov and, thus, the proposed solutions sort of reflect the wish of the key investor of the Party of Regions. The fact that Yanukovich appointed First Deputy Head of the Presidential Administration Iryna Akimova as the committee's executive secretary also proves a lot.

The key problem is that Ukraine’s Economic Development Agenda produced by the Foundation has become out-of-date. It was developed in 2007 in partnership with experts from McKinsey & Company and considered Ukraine’s economic development perspective at the times of plenty. It is true that McKinsey & Company took some efforts to update the document last fall by carrying out a new study “Reviving Ukraine’s Economic Growth”. Still, the recommendations of international experts were far, far from perfect; there were too many general phrases, which could not be applied to Ukrainian life situations. Finally, one month ago representatives of the Foundation presented their vision of the economic priorities for 2010. In total, there are seven economic priorities, which, the authors believe, can be implemented this year without committing significant resources.

The banking reform is the first priority. It is not a simple change in some of the NBU’s authorities but a complete restructure of the financial system, which is later to be based on several large or a larger number of medium-sized banks. The methods of implementation account for the extent to which the structure is relevant for Ukraine. Most Eastern European countries experienced gradual capital concentration strengthened both by the competition and more stringent regulatory requirements of the Central Bank. Most experts are inclined to believe that 179 banks is a big number as almost one hundred banks have the share close to zero. Still, rapid change in the banking system structure (in less that one year) can come as a serious shock.

The second priority area is adoption of the new Tax Code with the focus on tax administration rather than on tax rates. Although during the election campaign Viktor Yanukovich emphasized that he wants to cut VAT to 17% and corporate tax to 19% the authors of the reform realize that it is useless to keep the issue high on the agenda at the time of an absolutely enormous budget deficit. It would be much more reasonable, for example, to integrate an automated VAT refund technology as specified in the election agenda. Another thing to think about is who from the Yanukovich team could take responsibility for the issue considering the fact that it means “reduction in abuses by tax authorities”. By the way, the third priority area also relates to reduction in abuses – simplifying rules for doing business. Shorter terms for obtaining the permits, simplification of the permit system procedures through establishment of a single point of contact and implied consent, cancellation of one third of licenses and stiff regulatory policy in regards to state inspections are de jure in place. However, how does it work in practice? The principle of a single point of contact has been in place for five years but, as economists admit, it is not what it was supposed to be. For example, to start business you have to do both: register your business with the state registrar and collect certificates from the tax inspection, social funds, and statistical bodies and so on.

The fourth priority is lifting moratorium on farm land sales and creation of an efficient land market. The authors of the reform believe that it might attract billions in investments in Ukraine. Without questioning the idea it is interesting to note the different approaches of experts and politicians of the Yanukovich team. It was the former who suggested including the promise to lift the moratorium in the election agenda of the new President. And it was the latter who encouraged Viktor Fedorovich to announce that such a step is possible only after adoption of laws on the state cadastre and land market, that is not earlier than 2012. Experts of the Foundation for Effective Governance are confident that regulatory framework is already in place to ensure efficient land market and no more legislative initiatives are necessary. “We need to have a single electronic system of land cadastre, of course. Its creation is a long process, which can take place in parallel with the functioning market”, specialists believe.

While the first four areas of the reform are closely linked to the people the other three areas are exclusively in the interests of business and politicians. In particular, introduction of private-public partnership as the basis for infrastructure development and the conclusion that large-scale infrastructure projects can bring back to life the metal and construction sectors of economy. The requirement to improve the bankruptcy procedure, which usually takes years in Ukraine, is also in the interest of business. The seventh area of the reform, restructuring of the state apparatus, is rather a political call to stop purges. Continuity of work and separation of political management from the state apparatus is a good slogan. Still, the attempt to implement similar reform at the beginning of the 2000s failed. At that time state secretaries in the Ministries were supposed to have separated executive and political power verticals. However, there was no result. Viktor Yanukovich has already renamed the president's office from the “secretariat” to “administration” with the purpose to get rid of the previous staff. New ministers are believed to follow the same example despite all recommendations.

As a whole, it is worth noting that experts of Akhmetov’s Foundation tried to omit the issues painful for the society realizing that it is not real to address them in the fist year of Yanukovich’s presidency in the context of the upcoming elections to the local councils. Their plans do not include the social reform, proposals to cut the budget expenditures or to balance the Pension Fund. It is true that their reforms are based exclusively on the political will and do not require significant financial resources. However, today there are quire different pressing issues on the agenda.

TRADITIONAL REFORMS ARE DOOMED

Independent experts do not wish to understand that it is impossible in Ukraine to reform the system focusing just on economic feasibility and ignoring the political factor. As far back as in September last year International Independent Expert Commission was established to draft an action program for a new President (at the expense of Sweden and the Netherlands). As a result, an action program titled “Proposals for Ukraine: 2010 –Time for Reform” was written by 23 experts; senior fellow at Peterson Institute for International Economics and a famous specialist in the economies of Eastern European countries Anders Aslund being one of them. Last week the union of experts presented their vision of the reform for the next year. Just two items fit the agenda proposed by the Foundation for Effective Governance. They include deregulating business and launching a free farm land market. In contrast to the Foundation’s proposals, which have been partly met, the experts believe that simple simplification of the permit system is not enough for deregulating business. Ukraine needs a global goal, for example, to climb 40 positions in the pillar “Ease of doing business in the country” (now Ukraine is found well at the bottom of the ranking: 181st out of 183 countries). The experts believe that it is possible to attain the goal by providing equal rights and obligations to all business entities. In fact, this means both elimination of tax holidays and a simplified taxation system. This is absolutely opposite to the election promises of Viktor Fedorovich.

Most other priority reforms proposed by the experts are not important for ordinary Ukrainian citizens. For example, a gas sector reform, which includes liberalization of the gas market, access of gas traders to the market and increase in the energy carrier prices for population. While an ordinary citizen is not very much interested in the serious restructuring of Naftohaz Ukrainy and its division into transportation, delivery and extraction areas, the raise in the prices might cause serious misunderstanding with the electorate. Despite numerous calls Viktor Yanukovich gave a firm promise: no increase in the price of gas for domestic consumption. Timoshenko’s government made a note of the promise, so to cancel the decision means to suffer PR attack from the BYuT.

One more interesting recommendation is to cut budget expenditures. This includes a number of social reforms from raise of the state pension age by five years and up to implementation of a single social tax, elimination of the Pension Fund deficit, cancellation of preferential pensions based on professions. Introduction of obligatory non-state pension insurance must become the issue of the next two-three years. “It is necessary to understand that within the next several years Ukrainian public finances will experience the pressure of credit payments. Thus, it is impossible to increase social expenditures. It is time we introduce a certain cap, as percentage of GDP, which social expenditures most not exceed. In the future all state finances must depend on the highest possible percentage of GDP allowed to be spent on them. According to the experts Ukraine spends 16% of GDP on pensions; this is the highest pension/GDP ratio in the world, which is two times higher than in Europe. Yanukovich will never agree to increase the pension age as these people are his electorate. There is a possibility of introduction of a single social tax. Still, this is rather a favor for business than a social insurance reform. It is impossible to cut preferential pensions as they are protected by the Constitution of Ukraine, which prohibits reducing the existing benefits. Reduction in the social expenditures is possible only if the legislative norm is cancelled; and a pure wish of the guarantor is not enough.

The list of reforms in the political system also includes the necessity to introduce an open list of candidates for parliamentary elections, public financing of election campaigns and the majority system of elections to the local authorities. The proposal to cancel the obligatory 266 votes to pass all the laws in the Verkhovna Rada looks quite radical. “This rule can be applied for very important constitutional documents only. The majority of members of parliament is quite enough to pass the rest of the documents”, international analysts note. Still, in this case there is no sense in the existing political system based on the majority in the parliament. In addition, the methods used by people’s deputies to make their colleagues from other factions miss the meetings to pass the necessary decisions are quite unpredictable. So the reform is likely to be abandoned as politicians will not understand this.

The Ukrainian people might fail to appreciate the administrative-territorial reform which is recommended to be completed by the end of 2011. The reform includes reduction in the number of lowest-level administrative units (villages) and cuts the cost of keeping the bureaucratic apparatus at the units. The experts also propose to shift to competitive management system with the salaries fixed at the level of the market fee for top managers and the incomes dependent on the efficiency of the executed job.

According to the experts, to implement the reforms it is necessary to establish a separate governmental committee headed by the Vice Premier and to provide it with almost exclusive powers and a significant budget. The committee must not include representatives from other ministries subject to the reform, for example from the Ministry of Finances or the Ministry of Economy. We can only guess what can happen to the committee in the Ukrainian environment. For example, there is a risk that the committee will convert into another big bureaucratic apparatus to lobby the initiatives under the guise of reforms. Needless to say, no professional economists are eager to take the position and to bury all chances for their political career.