OECD Territorial Reviews
UkRꢀꢁnE OECD Territorial Reviews:
Ukraine
2013 This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries or those of the European Union.
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OECD (2014), OECD Territorial Reviews: Ukraine 2013, OECD Publishing.

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(CFC) at contact@cfcopies.com. FOREWORD – 3
Foreword
At the beginning of this new millennium, regional economies are confronting momentous changes. The globalisation of trade and economic activity is increasingly testing their ability to adapt and maintain their competitive edge. There is a tendency for income and performance gaps to widen between and within regions, and the cost of maintaining social cohesion is increasing. Rapid technological change and greater use of knowledge are offering new opportunities for local and regional development but demand further investment from enterprises, reorganisation of labour and production, more advanced skills and environmental improvements.
Amid this change and turbulence, regions continue to follow very different paths.
Some regions are doing well and are driving growth. Others are less successful at capturing trade and additional economic activities. Many territories with poor links to the sources of prosperity, afflicted by migration and ageing, and lagging behind with respect to infrastructure and private investment, are finding it difficult to keep up with the general trend.
At the same time, central governments are no longer the sole provider of territorial policy. The vertical distribution of power between the different tiers of government needs to be reassessed, as well as the decentralisation of fiscal resources in order to better respond to the expectations of citizens and improve policy efficiency. Public authorities need to weigh up current challenges, evaluate the strategies pursued in recent years, and define new options.
Responding to a need to study and spread innovative territorial development strategies and governance in a more systematic way, in 1999 the OECD created the Territorial Development Policy Committee (TDPC) as a unique forum for international exchange and debate. The TDPC has developed a number of activities, including a series of national Territorial Reviews. These studies follow a standard methodology and a common conceptual framework, allowing countries to share their experiences and disseminate information on good practices.
OECD TERRITORIAL REVIEWS: UKRAINE © OECD 2014 4 – ACKNOWLEDGEMENTS
Acknowledgements
The OECD Secretariat is grateful for the co-operation and support of the numerous
Ukrainian officials, experts and businesspeople who met the OECD team preparing the review and in other ways participated in the review process. Special thanks are given to
Inga Voytsekhovska and Roman Palahusynets of the Ministry of Regional Development,
Construction and the Communal Economy, the local team co-ordinators for the review.
The Secretariat is particularly grateful to the European Commission’s Directorate General for Regional Policy (DG Regio) for its financial support. The project also received critical support from the OECD’s Eurasia Competitiveness Programme, co-ordinated by the Organisation’s Private Sector Development Division.
The OECD Territorial Review of Ukraine was produced by the OECD Regional
Development Policy Division, directed by Joaquim Oliveira Martins. This report was drafted by David Bartolini, Emily Farchy and William Tompson, under the overall supervision of William Tompson, Head of the Urban Development Programme. Susana
Garcia-Lorenzo, Kate Lancaster and Therese Walsh provided editorial support. Erin
Byrne and Gemma Nellies prepared the manuscript for publication. Important inputs for
Chapter 2 were provided by Olena Lytvynenko, Programme Manager for the Council of Europe in Kyiv, and by Igor Shevliakov of the International Centre for Policy Studies in
Kyiv. Jacek Bialek of the Polish Ministry of Regional Development acted as peer reviewer.
OECD TERRITORIAL REVIEWS: UKRAINE © OECD 2014 TABLE OF CONTENTS – 5
Table of contents
Acronyms and abbreviations ....................................................................................................................9
Executive summary..................................................................................................................................11
Assessment and recommendations .........................................................................................................13
Chapter 1 Regional trends and Ukraine's productivity challenge ......................................................29
Introduction............................................................................................................................................30
The macroeconomic context..................................................................................................................30
Sub-national trends ................................................................................................................................35
Behind the trends: Inputs to growth and productivity............................................................................49
Notes......................................................................................................................................................70
Bibliography ..........................................................................................................................................71
Chapter 2 Improving Ukraine's sub-national level governance and service provision.....................73
Introduction............................................................................................................................................74
The current system of territorial governance in Ukraine .......................................................................74
Decentralisation reforms in Ukraine......................................................................................................87
Provision of local public goods..............................................................................................................93
Conclusion ...........................................................................................................................................103
Notes....................................................................................................................................................105
Bibliography ........................................................................................................................................106
Chapter 3 Strengthening regional development policy in Ukraine...................................................109
Introduction..........................................................................................................................................110
Putting regional development policy in context ..................................................................................110
The evolution of regional policy in Ukraine........................................................................................117
Building a more effective regional development policy......................................................................125
Improving regional development policy institutions ...........................................................................133
Strengthening regional development policy instruments.....................................................................143
Conclusion ...........................................................................................................................................170
Notes....................................................................................................................................................172
Bibliography ........................................................................................................................................175
Tables
Table 1.1. Selected economic indicators, 2009-12.......................................................................31
Table 1.2. Ukrainian administrative units....................................................................................36
Table 2.1. Territorial structure of sub-national authorities ..........................................................75
Table 2.2. Tax assignment in 2011 ..............................................................................................78
Table 2.3. Comparison of key revenues of sub-national tiers of government (millions UAH) ...82
Table 2.4. Budgetary transfers .....................................................................................................83
Table 2.5. Local government responsibilities in public service delivery.....................................94
OECD TERRITORIAL REVIEWS: UKRAINE © OECD 2014 6 – TABLE OF CONTENTS
Table 2.6. Housing maintenance services....................................................................................97
Table 3.1. Old and new paradigms of regional policy ...............................................................111
Table 3.2. Governance indicators, 1996-2012 ...........................................................................113
Table 3.3. Objectives of regional policy to 2020.......................................................................131
Table 3.4. Mutual dependence across levels of government: Multi-level governance challenges/gaps in OECD countries..........................................................................134
Table 3.5. Key priorities and governance arrangements to overcome challenges .....................135
Figures
Figure 1.2.
Figure 1.1. Composition of exports (2011) ...................................................................................32
Destination of exported goods (1996-11) ...................................................................33
Figure 1.3. Foreign direct investment, net inflows (current prices, million USD)........................34
Figure 1.4. Stocks and flows of FDI per capita, 2011...................................................................35
Figure 1.5. Regional specialisation (2000)....................................................................................37
Figure 1.6. Regional specialisation (2010)....................................................................................38
Figure 1.7. Sectoral growth trends ................................................................................................38
Figure 1.8. Gross regional product prior to the crisis (2000-07)...................................................40
Figure 1.9. Contribution to growth (1997-2007)...........................................................................40
Figure 1.10. Gross regional product (GRP) growth (2007-09) .......................................................41
Figure 1.11. Dispersion of regional GDP (2009) ............................................................................42
Figure 1.12. Inter-regional inequality: Income and services (2007) ...............................................43
Figure 1.13. Regional dispersion trends in Ukraine (2000-10) .......................................................44
Figure 1.14. Disaggregated regional human development index (2009-10) ...................................45
Figure 1.15. Regional human development index growth (2009-10)..............................................46
Figure 1.16. Agglomeration and growth .........................................................................................47
Figure 1.17. Dependency ratio ........................................................................................................50
Figure 1.18. Population age structure, Ukraine (2011) ...................................................................51
Figure 1.19. Migration.....................................................................................................................52
Figure 1.20. Population 65+ (proportion of total)...........................................................................52
Figure 1.21. Regional unemployment prior to the crisis (2000-07) ................................................53
Figure 1.22. Impact of the crisis on regional unemployment..........................................................54
Figure 1.23. Youth unemployment..................................................................................................55
Figure 1.24. Informal and formal wage employment by economic sector (percentage of total).....56
Figure 1.25. Economically active population aged 15-70 by educational attainment (2010) .........57
Figure 1.26. Percentage growth in number of students enrolled in tertiary education, by regional specialisation (2000-10)...........................................................................57
Figure 1.27. Regional wage disparities (ratio of average regional wage to national average)........58
Figure 1.28. Regional wage and price disparities (2011)................................................................59
Figure 1.29. Fixed capital investment, by source of financing (2000-11).......................................60
Figure 1.30. Stock of regional FDI, 2011........................................................................................60
Figure 1.31. Regional FDI by sectoral specialisation as measured in 2005....................................61
Figure 1.32. Fixed capital investment (per capita, thousand UAH)................................................61
Capital exhaustion by oblast (2007, 2008) .................................................................62
Figure 1.34. Metro usage (millions passengers per square km) ......................................................63
Figure 1.35. Transport infrastructure and usage (2011)..................................................................64
Figure 1.36. Housing prices, rents, and wages across Ukraine, 2011 .............................................65
Figure 1.37. Perceived constraints to business (2008) ....................................................................65
Figure 1.38. Doing business in Ukraine (2012, 2013).....................................................................66
Figure 1.39. Ratio of the average productivity of entrants and exiters to incumbents....................67
Figure 1.33.
OECD TERRITORIAL REVIEWS: UKRAINE © OECD 2014 TABLE OF CONTENTS – 7
Figure 1.40. SME sector in Ukraine, 2010......................................................................................68
Figure 2.1. The share of sub-national government (SNG) revenues with respect to total revenues of each country.............................................................................................77
Figure 2.2. SNG share of expenditures and revenues in 2010 ......................................................79
Evolution of the budget balance at the regional level (oblasts)..................................80
Figure 2.4. Share of resources for selected functions (2011) ........................................................80
Figure 2.5. Per capita expenditures in selected services at the regional level (2011) ...................81
Figure 2.6. Local government own-source revenues.....................................................................82
Figure 2.7. Dependence on central government transfers (values in UAH billions).....................83
Figure 2.8. Revenues from personal income tax (PIT)..................................................................86
Figure 2.9. Distribution of Development Fund in 2012 with respect to gross regional product...87
Figure 2.10. Overall level of residents' satisfaction with housing maintenance services................99
Figure 2.11. Aggregated indices of satisfaction about provision of maintenance services
Figure 2.3.
by housing management enterprises .........................................................................100
Figure 2.12. Factors influencing the process of medical service provision...................................101
Figure 3.1. Regional development documents ............................................................................121
Figure 3.2. Gini coefficient for average per capita GDP by region.............................................128
Figure 3.3. The contribution of information systems to regional development policy ...............140
Figure 3.4. Planned allocations from the State Regional Development Fund in 2013................144
Figure 3.5. Transactional vs. relational contracting ....................................................................150
Boxes
Box 1.2.
Box 1.1. Agglomeration economies ..........................................................................................47
Migration – If inequality is pronounced, why not more migration?...........................49
Box 2.1. The Communist Party and the Soviet political structure.............................................76
Box 2.2. Advantages and drawbacks of decentralisation ..........................................................88
Box 2.3. Efficiency networks in service delivery......................................................................98
Box 2.4. Summary of main policy recommendations .............................................................104
Box 3.1. The Law on Stimulating Regional Development (2005) ..........................................118
Box 3.2. The Council of Regions ............................................................................................122
Box 3.3. The draft law “On the Foundations of State Regional Policy” .................................126
Box 3.4. Mechanisms for national cross-sectoral co-ordination in OECD countries..............137
Box 3.5. Lessons from the use of performance indicators in regional policy .........................142
Box 3.6. The reform of federal transfers in the Russian Federation........................................146
Box 3.7. The use of contracts for regional development in OECD countries .........................148
Box 3.8. Types of special economic zones..............................................................................155
Box 3.9. Key challenges for developing public-private partnerships......................................164
Box 3.10. OECD Principles on Public Governance of Public-Private Partnerships ................167
Box 3.11. Summary of main policy recommendations on regional development policy..........171
OECD TERRITORIAL REVIEWS: UKRAINE © OECD 2014 ACRONYMS AND ABBREVIATIONS – 9
Acronyms and abbreviations
Association of Ukrainian Cities
Compound annual growth rate
Commonwealth of Independent States
Cabinet ministers of Ukraine
Consumer price index
AUC
CAGR
CIS
CMU
CPI
European Banking Authority
European Bank for Reconstruction and Development
Export processing zone
EBA
EBRD
EPZ
European Union
EU
UEFA European Football Championship
Foreign direct investment
Euro 2012
FDI
Finance, insurance and real estate
Free trade zone
FIRE
FTZ
Gross domestic product
Gross regional product
GDP
GRP
HCs
Housing co-operatives
Homeowners associations
HOAs
ICPS
IFC
ILO
IMF
International Centre for Policy Studies
International Finance Corporation
International Labour Organization
International Monetary Fund
Information technology
IT
Norwegian Association of Local and Regional Authorities
Municipal management enterprise
Medical-obstetrical unit
KS
MME
MOU
NARDA
NERC
NIBR
NUTS
ODA
National Association of Regional Development Agencies
National Electricity Regulatory Commission
Norwegian Institute for Urban and Regional Research
Nomenclature of territorial units for statistics
Official development assistance
OECD TERRITORIAL REVIEWS: UKRAINE © OECD 2014 10 – ACRONYMS AND ABBREVIATIONS
Personal income tax
PIT
Private management enterprise
Public-private partnership
PME
PPP
Regional Development Strategies
State Fund for Regional Development
Socio-economic Development Strategies
Special economic zone
RDS
SFRD
RSEDS
SEZ
Specialised zone
SZ
Small and medium enterprises
Sub-national government
SME
SNG
State-owned enterprises
SOE
State Strategy for Regional Development
Strengths, weaknesses, opportunities, trends
Territorial level 2
SSRD
SWOT
TL2
Territories of priority development
Ukrainian hryvnia (national currency)
Union of European Football Associations
United Nations
TPD
UAH
UEFA
UN
United Nations Conference on Trade and Development
Value-added tax
UNCTAD
VAT
WDI
WEF
WHO
WTO
World Development Indicators
World Economic Forum
World Health Organization
World Trade Organization
OECD TERRITORIAL REVIEWS: UKRAINE © OECD 2014 EXECUTIVE SUMMARY – 11
Executive summary
Key facts and policy issues
Key facts
•
Ukraine’s regions continue to struggle economically, having failed to regain the growth momentum they enjoyed in the years before the crisis hit in 2008-09.
Export demand remains muted, and domestic demand growth is constrained by slow credit growth, lack of fiscal space and an institutional environment that is not conducive to investment.
•
•
•
Inter-regional disparities are large by OECD standards and they continue to increase. However, they are not out of line with those of Ukraine’s peers. The increase in disparities has been driven almost entirely by the city of Kyiv, with most other regions’ contributions to growth being roughly in line with their size.
There is evidence of significant disparities in access to basic services, especially education. Moreover, the human development index deteriorated in most
Ukrainian regions during 2000-10, and only 12% of the population lived in regions where it improved.
Productivity performance in much of Ukraine has been relatively poor. The industrial capital stock is limited and deteriorating. The large informal labour market makes it difficult to assess labour-market trends with precision but the link between education and productivity appears to be weak.
Key policy issues
•
Ukraine is a highly centralised polity. There is wide agreement on the need for greater decentralisation, but sub-national governments often face capacity challenges and they are extremely fragmented at lower levels, making it impossible to realise economies of scale or even to perform some basic serviceprovision functions effectively.
•
Sub-national governments tend to depend heavily on central transfers, the allocation of which they find at times to be both unpredictable and less than transparent. Reforms to sub-national public finances have been in preparation for some time and need to be taken forward. Lack of resources combined with weak arrangements for the assessment of service quality mean that access to goodquality public services remains a challenge for many.
•
Regional development policy is undergoing a major legislative and institutional overhaul, after a decade of incomplete reforms. This presents both a challenge and an opportunity: the governance of regional development policy needs to be strengthened, the range of instruments used needs to be broadened and clarified, and the mechanisms for performance monitoring and evaluation need to be enhanced.
Key recommendations
•
Revise the formulae for the allocation of transfers to sub-national tiers of government in order to make it simpler and less discretionary, by reducing the number of indicators used in the formula. Resources allocated for the provision of OECD TERRITORIAL REVIEWS: UKRAINE © OECD 2014 12 – EXECUTIVE SUMMARY local public services should be based on the needs of the population in each area, not input indicators.
•
A territorial reform should be implemented prior to any decentralisation of functions to lower levels of government; such a reform should facilitate municipal mergers and the further development of new forms of inter-municipal co-operation; simplify the legal procedures involved in transferring competences to joint bodies or companies; and provide additional incentives to jurisdictions that implement new types of co-operative relationships.
•
Revise the revenue structure of the oblasts, Crimea and the cities of Kyiv and Sevastopol to allow them to retain any extra revenue generated at the oblast or local level.
•
•
•
Introduce a property tax to enhance municipal financial capacity; its introduction should be preceded by the creation of a reliable cadastre.
Create a monitoring system for the effectiveness of the policies implemented, with special reference to local public goods and services.
Revise the allocation rules for the State Fund for Regional Development (SFRD) so as to avoid sharp differences in the treatment of similar places. This should be accompanied by steps to enhance the transparency of allocation of other central transfers to sub-national governments.
•
•
Use the SFRD as an instrument to foster inter-regional co-operation; link such efforts to broader national projects and priorities.
Make greater use of SFRD allocations to promote experimentation with
“softer”, more flexible instruments for regional development. Issues related to disparities in the provision of basic services should be addressed via equalisation transfers and/or safety nets.
•
Make a rigorous cost-benefit analysis of any special zones or industrial parks, designing them with reference to international best practice, particularly by working to:
ꢀ minimise spatial distortions and maximise the zone’s integration with the wider economy;
ꢀ focus on “non-addictive” forms of support that will foster new, selfsustaining activities rather than on-going dependence;
ꢀ use special zones to pilot reforms that could then be scaled up, possibly including the piloting of decentralisation reforms that could empower regions and cities.
•
•
•
Better focus the support to entrepreneurship on underused labour in different regions (e.g. women) and further promote social entrepreneurship through partnerships with local and regional authorities.
Strengthen the co-ordinating and strategic role of central co-ordinating bodies
(like the inter-departmental commission) that deal with regional development policy, vis-à-vis both other ministries and with lower levels of government.
Implement stronger contractual arrangements to support Regional
Development Programmes, with an obligatory status and integration into national and sub-national budgets. Use the contracts as an instrument for agreeing on medium-term SRDF priorities.
OECD TERRITORIAL REVIEWS: UKRAINE © OECD 2014 ASSESSMENT AND RECOMMENDATIONS – 13
Assessment and recommendations
Ukraine’s regions have struggled since the onset of the global crisis
Overall, Ukraine’s regions have struggled to regain growth momentum since the global crisis erupted in 2008-09. After contracting through the 1990s, the economy returned to growth just before the turn of the century, and all regions enjoyed a period of positive – and in some cases very strong – growth through 2007. In 2008, the economy more or less stagnated as the world economy slowed, and it experienced a sharp contraction in 2009. The downturn was fairly broad-based – all regions contracted – but it was severest in the country’s main economic centres: roughly half of the output loss recorded in 2009 took place in four regions, accounting for 37% of pre-crisis GDP. This outcome reflected to a great extent the collapse of world trade, which hit major exporting regions disproportionately. This, in turn, underlies to a significant extent the shakiness of the subsequent recovery: export demand has remained muted, and domestic demand growth is constrained by slow credit growth and a lack of room for fiscal stimulus.
Ukraine as a whole, as well as its constituent regions, must therefore find a growth model that is less exposed to volatile external markets and yet is not based on an unsustainable growth in domestic credit or government spending.
Inter-regional disparities are large and growing but not out of line with those of Ukraine’s peers
While there has been some widening of inter-regional disparities in both growth performance and levels of GDP per capita in recent years, the increase in disparities was driven largely by the dynamism of the capital region: the city of Kyiv accounted for roughly 20% of aggregate growth over the decade to 2008: most other regions’ contributions to growth were roughly in line with their size, implying little change in the geographic concentration of activity, apart from the rapidly growing concentration around
Kyiv. The widening of inter-regional disparities amid the strong growth of the pre-crisis decade was in any case typical of economies in transition. Inter-regional disparities in