Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute forInternational EconomicStudies

www.wiiw.ac.at

Challenges of Ukraine’ Economic Transition

Strategic Development AgendaLessons from Transition ExperiencesImplementing AA/DCFTA AgreementsPolicy lessons

Amat Adarov adarov@wiiw.ac.at Peter Havlik havlik@wiiw.ac.atMichael Landesmann landesmann@wiiw.ac.atVienna Institute for International Economic Studies

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� Lessons learnt from other transition experiences:

� Economic catching-up

� Industrial restructuring

� Attention to external imbalances

� Specific situation of Ukraine: directions and structure of trade

� Challenges of AA/DCFTA implementation

� FDI policies

� Policy recommendations

Topics covered

3

0

10

20

30

40

50

60

70

80

90

100

1991 1995 2000 2005 2008 2010 2013 2014 2015

RS TR AL BiH KZ RU UA NMS-11

Income convergence: selected EU neighbours real per capita GDP, EU-28 average = 100

Source: wiiw estimates and forecasts.

4

Manufacturing value added, in % of GDPmore than 20% in RO and CZ (as DE, IR); Ukraine: 12%

Source: own calculations based on WIIW Database and Eurostat.

0

5

10

15

20

25

30

35

Ukraine MT LV BG EE PO SI LT HU SK RO CZ

1995 2000 2005 2011

0

5

10

15

20

25

30

EL FR DK NL UK BE ES IT SE FI PT AT DE IE

5

Manufacturing activity is increasingly concentrated in a Central European Core

Change in value added share of manufacturing

(2000-2013)declining share

constant share

rising share

Note: Manuacturing export intensity is manufacturing exorts(in EUR) / population

6

-40

-20

0

20

40

60

80

100

CEE-5 BG, RO Baltics ES, GR,PT

WBC - 6 UA

Goods exports Services, credit Goods and Services

External trade, 2003-2015, in % of GDP - Persistent low export

capacity in some groups of countries

Source: wiiw Annual Database incorporating national and Eurostat statistics.

7

-40

-30

-20

-10

0

10

20

CE

E-5

BG

, RO

Bal

tics

ES

, GR

, PT

WB

C -

6 TR

UA

Goods and Services Primary Income Secondary Income Current Account

Composition of the current account of the balance of payments, 2003-2015, in % of GDP - pre-crisis: run-away deficits in some

countries (trade balances, capital inflows); post-crisis (‘sudden stop’; income effects)

Remark: Components refer to BOP 6th edition as far as available, BOP 5th edition before. Primary income refers to Income Accounts, secondary income to current transfers.Source: wiiw Annual Database incorporating national and Eurostat statistics. .

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Source: Eurostat and wiiw own calculations.

Position of manufacturing and longer-term trade balancesShare of manufacturing in GDP in 2005 and exports/imports of goods and services, average 2002-2008 –Manufacturing particularly important for medium-income countries!

Ireland

Germany

Austria

Belgium

Denmark

Finland

FranceNetherlands

Sweden

Bulgaria

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Poland

RomaniaSlovakia

Slovenia

Albania

Bosnia and Herzegovina

Croatia

Macedonia

Montenegro

Serbia

Greece

Italy

Portugal

Spain

0.0

5.0

10.0

15.0

20.0

25.0

40.0 50.0 60.0 70.0 80.0 90.0 100.0 110.0 120.0

Sha

re o

f man

ufac

turin

g in

GD

P,

2005

Exports/Imports of goods and services, 2002-2008

9

Imports Exports

Source: Observatory of economic complexity, MIT

Ukraine’s trade dynamics, 2000-2014

10

Imports Exports

Source: Observatory of economic complexity, MIT

Ukraine’s trade by partner, 2014

11

Imports Exports

Source: Observatory of economic complexity, MIT

Ukraine’s trade by sector, 2014

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DCFTA implementation highlights

• Trade-related aspects: liberalization of trade in goods and services• Deep aspects: food safety/SPS measures, technical standards, public

procurement, etc.• Comprehensive aspects: competition/monopoly regulations, access to

public procurement, intellectual property, sustainable development, etc.

• Approximation to (takeover of) the EU acquis communautaire• Temporary autonomous concession of preferential access to the EU market• Barriers to trade: binding low TRQs (agri-food produce), technical and SPS

regulations, etc.• Transitory arrangements for certain products (e.g. special regime for worn

clothing and passenger vehicles; surcharge export duties for Ukraine)

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Ukraine’s trade regime change in 2016

• UA-EU DCFTA: autonomous preferences for UA exports by the EU (since 04/2014) � full implementation starting 01/2016

• UA-CISFTA: suspended by Russia upon DCFTA implementation• Ukraine joined the sanctions against Russia• Mutual embargo by Russia and Ukraine (food products), special transit regime, etc.• Marginal impact likely limited in light of the trade collapse due to recession

Other major background factors

• Military conflict and political infighting• Deep recession and macroeconomic instability• Sharp depreciation of hryvna and pass-through to inflation• Feeble external conditions:

• Still weak demand in Europe, recession in Russia• Soft global commodity prices

• Non-tariff barriers to trade: TRQs, technical and SPS regulations

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Share of the EU and Russia in total trade of Ukraine, 2003-2015

Source: Calculations based on wiiw database.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2003 2005 2007 2009 2011 2013 2015

Russia EU-28

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2003 2005 2007 2009 2011 2013 2015

Russia EU-28

Exports (down by 29% in 2013-15) Imports (down by 44% in 2013-15)

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Ukraine‘s main trading partners2015, in % of total

Source. wiiw Annual Database, national statistics.

RU, 12.7

TR, 7.3

CN, 6.3

EG, 5.5

PL, 5.2IT, 5.2

IN, 3.7DE, 3.4

RoW, 50.6

UA exports (31.7 bn EUR)-29% less than in 2013

RU, 20.0

DE, 10.4

CN, 10.1

BY, 6.5PL, 6.2

HU, 4.1US, 3.9

IT, 2.5

RoW, 36.3

UA imports (34.6 bn EUR)-43% less than in 2013

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30

05

101520253035

I II III IV V VI

VII

VIII IX X XI

XII

XIII

XIV XV

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I

XV

II

XV

III XX

Structure of Ukraine‘s exports, 2015, in %

to EU-28 (34% of total exports)

to Russia (12.7% of total exports)

Source: Own calculations based on UKRSTAT.

Base metals Machinery

TransportequipmentTransportequipment

Base metalsGrain

Mineral products

Chemicals

Machinery

Paper

TextilesTextiles

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IRON AND STEEL;14319CEREALS; 6371

ORES, SLAG AND ASH; 3918

NUCLEAR REACTORS; 3835ANIMAL OR VEGETABLE FATS AND OILS

; 3507

ELECTRICAL MACHINERY AND EQUIPMENT;

3139

MINERAL FUELS; 2865

ARTICLES OF IRON OR STEEL;2590

RAILWAY OR TRAMWAY LOCOMOTIVES, 2463

OIL SEEDS AND OLEAGINOUS FRUITS; INDUSTRIAL OR MEDICINAL PLANTS;

STRAW AND FODDER; 2048

INORGANIC CHEMICALS 1744

FERTILISERS; 1171

WOOD; 1144

PAPER AND PAPERBOARD;1080

RESIDUES AND WASTE FROM THE FOOD INDUSTRIES;923

-5

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10

15

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25

30

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40

45

50

55

60

65

70

75

-5 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75

Share of the EU in total industry exports from

Ukraine, %

Share of Russia in total industry exports of Ukrain e, %

Top 15 biggest export industries of Ukraine, 2013bubble size = export value in USD million

Source: own calculations based on UN Comtrade data

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Regional composition of exports, 2012(pies proportional to the value of exports in USD mn)

RussiaBelarus

PL

SK

HURO

MD

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Major outliers:

Meat: +14000% (EUR 65 mn)Glass: +130% (EUR 60 mn)Copper: +140% (EUR 54 mn)Dairy: +60% (EUR 48 mn)

2532

16501034

957

768

653

623

519

496

302

243

215

-80

-60

-40

-20

0

20

40

60

0 5 10 15 20 25

Iron & steel

CerealsEl. Mach.

Ores

Wood

Oil

seeds

Fats

wiiw calculations based on Eurostat Comext database.

EU imports from Ukraine, 2015 (total 12260 EUR mn)growth 2013-2015 (Y: -8.1%) and shares in total (X)

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Wrap up summary on recent foreign trade developments

� Ukraine 2015

• exports to EU down by 8% since 2013, highly concentrated (top 10: 80%)

• imports from EU down by 40% since 2013

• trade deficit with the EU (EUR 1.5 bn in 2015 after EUR 10 bn in 2013)

Memo (other DCFTA countries performed better in export s)

� Georgia 2015

� exports to EU up by 9% since 2013, highly concentrated (top 5: 80%)

� imports from EU down by 8% since 2013

� trade deficit with the EU (EUR 1.1 bn in 2015 after 1.4 bn in 2013)

� Moldova 2015

� exports to EU up by 27% since 2013, highly concentrated (top 10: 80%)

� imports from EU down by 9% since 2013

� trade deficit with the EU (EUR 0.9 bn in 2015 after 1.3 bn in 2013)

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Regional specialisation,by value added of economic activities in 2012

Mining, Industry,

Agriculture,Wood-based

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FDI inflow in % of GDP

Source: wiiw FDI Database.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Belarus Poland Romania Ukraine CESEE

2007 2008 2009 2010 2011 2012 2013 2014

2015: EUR 2.7 bn(3.5% of GDP)

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Cyprus37.6%

Germany13.3%

Netherlands12.8%

Russia6.4%

Austria6.5%

United Kingdom5.2%

Virgin Islands, British4.5%

France3.1%

Switzerland3.6%

Italy2.2%

Poland2.3% USA

1.8%

Sources: wiiw FDI Database.

Inward FDI stock by main investors, EUR 44.3 billion, end-2014 (revised, including debt instruments)

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Cyprus35.4%

Germany13.1%Netherlands

13.8%

Russia8.1%

Austria6.5%

United Kingdom4.8%

Virgin Islands, British4.2%

France3.1%

Switzerland3.8%

Italy2.4%

Poland2.2%

USA1.8%

Sources: wiiw FDI Database.

Inward FDI stock by main investors, EUR 46.9 billion, end-2015

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Policy recommendations from earlier wiiw study “How to Stabilise the Economy of Ukraine”; available at: http://wiiw.ac.at/publications.html

� Conflict resolution necessary to allow less military and more social

and infrastructure spending

� Exchange rate regime should move towards more stability; requires

more Forex reserves

� Energy tariff hikes will not suffice without energy-saving investments

� Social support programs to maintain support for reform measures

� Institutional, legal reforms, ‘de-oligarchisation’ required for FDI and a

sustainable economic development

� Ideally: ‘Marshall Plan’ for Ukraine with more funds and strict

conditionality on implementing institutional, legal, political reforms.

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Policy recommendations (II)

� Consider careful phasing-in of implementation of DCFTA between

Ukraine and EU

� Attention to adjustment costs; limited resources to deal with

macroeconomic stabilisation and industrial restructuring at the

same time

� Keep in mind longer-run market access to Russia and other CIS

� Trilateral talks (EU-Ukraine-Russia) on TBT and SPS

� Attempt to keep Ukraine also in CISFTA

� Long-run vision of Ukraine as a bridge between EU and EAEU;

will contribute to FDI attractiveness

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Policy recommendations (III)

� FDI policy :

• Institutional, legal reforms vital for investment climate

• Active FDI promotion agency

• Improve local authority administration (focus on some first)

• Set up industrial / business parks

• Individual package of incentives for large investors

• Support interaction of foreign investors with local authorities and

domestic businesses

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Policy recommendations (IV)

� ‘Industrial heartland’ is currently in the East

� Most affected by the military conflict and in the past oriented largely towards Russia

� Requires massive investments, also public: infrastructure; market reorientation and industrial modernisation/diversification

� Western provinces

� Less affected by the war but also less developed and poorer; however scope for diversification (agro-food, wood-based, light industry, 2nd tier cities: tradable services)

� Can benefit from cross-border cooperation with NMS (PL, SK, HU)

� De-concentrate market structures : effective competition authority, facilitate entry of new companies; liaise with FDI policy measures

� Technical assistance from EU; labour market policies essential

Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute forInternational EconomicStudies

www.wiiw.ac.at

Thank you for your attention!

wiiw is currently working on a new in-depth comparative analysis of AA/DCFTA costs and benefits implementation

More details in the 2015 wiiw study“How to Stabilise the Economy of Ukraine” by Adarov, Astrov, Havlik, Hunya, Landesmann, Podkaminerfreely available at:http://wiiw.ac.at/publications.html