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Russia/Ukraine: World Bank Official Analyzes Economic Woes

Prague, 23 May 1997 (RFE/RL) -- A senior economist at the World Bank says excessive official regulation of the economy, as well as pervasive corruption, are among the key reasons why Ukraine and Russia have remained enmired in economic woes.

Daniel Kaufmann, formerly head of the World Bank's Kyiv office, analyses the problems in the latest issue of the bank's magazine. At present Kaufmann is on leave from the bank as a visiting scholar at the Harvard Institute of International Development.

He poses the question of why Ukraine and also Russia have been unable to start on the path of recovery even though the macro-economic fundamentals are in place, with budget deficits cut, inflation lowered, and exchange rates stabilised.

He looks primarily at the Ukraine, but many of the same examples apply to Russia. Basing his argument on various surveys in both countries, he says that most companies believe they have not benefitted from reforms at all. For instance in Ukraine, taxes are high, some even prohibitive. The laws governing taxation are ambiguous and their application can be discriminatory. Even basic necessities like commercial codes are lacking, which means that few business contracts are regarded as final or binding.

As to rampant over-regulation by authorities, Kaufmann notes that Kyiv last year continuously strengthened its regulation of production, pricing, bank credit, and foreign trade. He says it is not surprising that direct foreign investment in the Ukraine has averaged less than $5 per capita per year. This compares with a comparable rate in Hungary of $1,200. Large, promising investments have recently become bogged down in red tape, and some large investors are leaving Ukraine.

A key side effect of the over-regulation and oppressive taxation is that a lot of business is moving underground. In the communist era, the unofficial economy was estimated to have amounted to 10 to 15 percent of the USSR economy. By mid-1996 the unofficial segment of the Ukraine economy had grown to an estimated one-half of that country's overall Gross Domestic Product.

Many of the companies surveyed said they had paid bribes to avoid taxes and regulations. Senior management of new enterprises in Ukraine had to spend a staggering 40 percent of their working hours with officials to secure the necessary permits and licences, and to finalise various arrangments. In Russia the same figure was about 30 percent. Kaufmann writes that by comparison, businessmen in the Central American state of El Salvador spent 8 percent of their work time visiting officials.

He says that the national level, the unofficial economy reduces the country's tax base and official foreign exchange holdings, which increases capital flight, and lessens the state's ability to manage the economy.

In order to attack these problems, Kaufmann recommends launching major deregulation programs, which would provide a level playing field for new enterprises and would dispense with myriad licenses. Necessary permits, such as that relating to health, environment, and safety, would remain.

Abuses of government powers should be eliminated, including forced delays at customs, arbitrary cancellations of import permits, and levying of steep penalties, and restrictions on domestic agricultural trade should be lifted.

Tax rates should be reduced and the tax regime simplified. Kaufmann also says that large industrial structures need to be de-monopolized, this being particularly urgent in Russia, and privatisation should be accelerated, and bureaucracy cut.

Kaufmann writes that a window of opportunity is now open to take bolder measures in both Ukraine and Russia, and that with the support of the international community, their governments might be able to carry out a bold improvement program. He says that if the historic opportunity is seized, both countries could look forward to vigorous and sustained growth.