Ukraine
The Development Challenge
After prolonged economic stagnation during the 1990s, Ukraine has made some strides in developing and implementing sound macroeconomic policies and in strengthening its financial institutions. Ukraine has also started to lay the foundation of a legal environment conducive to private sector growth. However, despite recent, strong economic growth rates, delays in structural reforms still stymie more profound longer-term progress. The Government of Ukraine (GOU) has made considerably less progress in establishing the spread of sound democratic institutions and practices. While there are promising signs of political reform for elected local government, weak political accountability, particularly at the national level, unequal enforcement of law, and tightly controlled media hinder democratic development. In the education, basic services, and health sectors, weak government policies, corruption, and outdated management practices continue to hinder the state's ability to provide adequate services and protect the most vulnerable population groups.
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Cautious macroeconomic policies, increased consumer spending, and external demand were major factors behind strong economic growth in 2003. In January-September 2003, the GOU maintained a budget surplus and a stable foreign exchange rate. Real GDP growth exceeded 6% while inflation was only 4%. The Government also made improvements to state procurement processes, state auditing procedures, and the administration of social transfers. Significant problems still remain, however, such as the accumulation of tax arrears (now equal to 29% of the national budget) and the use of non-cash transactions to settle public sector liabilities.
The GOU pursued the development of a sounder financial system by making progress in accounting reform and through the establishment of an independent regulator for non-bank financial institutions. These institutional developments, together with strong economic growth, have stimulated the financial sector not only to grow, but also to develop new and more sophisticated products. Important legal reforms included the passage of a Civil Code, a Personal Income Tax Law and a Legal Entity Registration Law. However, poor structural policies (particularly, in the energy and foreign trade sectors), high transaction costs and the extensive network of direct government subsidies and implicit taxes, continue to distort the efficient allocation of resources. Overall, businesses still face extensive barriers, such as long delays in registration procedures, a myriad of non-tax penalties, and high real interest rates. Because of these distortions, the informal economy remained sizeable by most estimates.
Due to conflicting legislation, a weak judiciary, and an ambivalent attitude towards international corporate governance practices, foreign direct investors continue to be wary of Ukraine. As a result, Ukraine still has one of the lowest per capita levels of direct investment in the region (about $130 per capita). Furthermore, the GOU's reticence to take further hard steps on the reform path has put a damper on cooperation with the International Monetary Fund (IMF) which decided to defer approval of a precautionary stand-by arrangement until the GOU made more tangible advances in reducing value added tax exemptions and refund arrears. However, at the end of the year the Government appeared to be closer to reaching agreement with the IMF.
Limited progress was made during FY 2003 towards developing an increasingly transparent, democratic government. Although political parties and other civil society organizations have become more visible, so far these groups have not been able to mobilize their constituencies and offer easily distinguishable services to the public. Moreover, increased media censorship and extensive pressure on the opposition to support the current Government has tempered progress in the democracy arena. With the approaching presidential elections, the situation is unlikely to improve. Therefore, a growing majority of Ukrainians feel that democratic change is not occurring.
Frequent changes of key personnel within the coalition Government over the past year did not fundamentally alter the political landscape. However, the shuffling of positions has impaired the GOU's institutional capacity to develop and implement sustainable national development policies, as well as serious policy debate and efforts to increase transparency within the government. In the absence of effective political opposition, strong civil society organizations and an institutionalized system of checks and balances, these factors have particularly hindered advances in the social sector.
The Government has made little progress towards advancing modern social practices in health, education and social security. The official data show that about 30% of the Ukrainian population still live in poverty. The growth of HIV/AIDS and other infectious diseases has been increasing at an alarming rate. The level of domestic violence, alcoholism, prostitution, and abandoned children are also of concern. Perhaps the only important positive legislative development in this area was the adoption of pension legislation, which opens tremendous possibilities for private sector expansion. Otherwise, social systems continue to be characterized by low staff morale, obsolete equipment, and ineffective practices.
The USAID Program: The overall strategic goal of the USAID Mission, increased social and economic well-being of all Ukrainians within a framework of democratic governance, has several facets. First, to improve the investment climate and accelerate the growth of small and medium enterprises (SMEs) and agriculture, USAID supported Ukraine's aspired accession to World Trade Organization and continued partnering more with local governments, private sector, and non-governmental organizations. For example, USAID reprogrammed its assistance in the fiscal area to local governments, expanded support to SMEs, and started new programs to improve agricultural marketing and access to bank finance in the rural areas. USAID, however, also had to withdraw its support to the energy sector because of the GOU's inability to pursue key sectoral policy reforms.
Second, to improve democratic governance by strengthening government institutions and civil society, USAID started a new project that consolidates and institutionalizes democratic practices in the Parliament. Also, given the increasing pressure on the media, USAID continued providing support to independent media, focusing on financial viability and improving the legal and regulatory framework, and developed a program aimed at increasing citizens' participation and transparency during elections.
Finally, in response to Ukraine's emerging HIV/AIDS epidemic, USAID has designed a new HIV/AIDS strategy that will focus on reducing the HIV/AIDS transmission rate and the disease's associated stigma and discrimination. USAID also began a new project to develop modern prenatal services and will begin a new five year program to reduce trafficking of women and children.
Other Program Elements: USAID/Ukraine receives support for mother-to-child transmission of HIV/AIDS and will receive Washington matching funds for the new HIV/AIDS strategic objective. USAID is also providing support to Ukraine's $92 million Global HIV/AIDS Fund to develop a national surveillance and evaluation system, support procurement of anti-retro viral drugs, and provide key technical assistance to principal HIV/AIDS-stricken regions. Other health program-related support is provided through a World Health Organization grant for tuberculosis control and a policy project for reproductive health. With USAID funding, the Eurasia Foundation manages an economics education program and small research grants.
Other Donors: The largest donor is the European Bank for Reconstruction and Development (EBRD) with a portfolio in food production, financial sector development, energy, and transport development. The World Bank (WB) supports programs in public utilities, agriculture, health, social protection, and public finance. The U.S. is Ukraine's largest bilateral donor, followed by the European Union (EU) which funds programs for institutional, legal, and administrative reform, private sector support, and economic development. The United Kingdom (UK) provides assistance in social protection, governance, civil society, and private sector development. Canada and Germany assist in public policy development and capacity building, private sector development, and education. USAID cooperates with the EBRD for SME development, the WB and the EU for policy reform, agriculture, and social transformation, with the UK for social protection and governance, and with Canada and Germany for private sector development and agriculture.
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