Should Ukraine follow
the Polish example?

by Bartosz Radzikowski, Junior Economist at CASE — Center for Social
and Economic Research | 23.02.2015

Despite a protracted conflict in its Eastern regions, Ukraine has the opportunity to be born again.. President Poroshenko is, indeed, keen to conduct a wide reform package in many areas, unlike his five predecessors. Recent aid from Polish Prime Minister Ewa Kopacz, in the form of a €100M credit and the offer of sharing best practices in public administration reforms, is both a neighborly support and the wish to strengthen Poland’s relations with Ukraine.

In Ukraine, the areas of governance quality, transparency and level of bureaucracy are the ones which need the most improvements. This is why the new Ukrainian government should not only focus on the best practices from Poland but also benefit from other countries’ positive experience. In fact, other transitioning economies such as Georgia and the Baltic States (GBS), which are champions in these fields, provide many constructive ideas for improvement. Indeed, the World Bank’s Doing Business 2015 report ranks Georgia’s and the Baltic States’ achievements way above Poland’s (see Graph. 1), with special mention for Georgia. The success of Mikheil Saakashvili and his United National Movement was actually based on policies aiming at simplifying the way business is made.

In Georgia, only a ‘Double 2’ (2 days and 2 procedures) meets the regulations’ requirements to start a business, where in Lithuania a ‘Double 3’and in Estonia a ‘Double 4’ suffice, according to the Doing Business 2015 report. These examples show that these countries adopted more efficient and simpler proceedings in business creation, compared to the four procedures and 30 days which are still required in Poland. Moreover, significant differences can be observed in registering property, dealing with construction permits, and trading across borders. In Poland, a property is registered following six procedures which take approximately 33 days to be completed, while in Georgia, it takes only one procedure taken care of in one day. Similarly, dealing with construction permits requires eight procedures in Georgia compare to nineteen in Poland. Lastly, cross-border trade seems to be highly difficult in Poland, compared to the GBS. The best practice in this area comes from Estonia, ranked 6th by the World Bank.

Furthermore, the most significant example of Polish flaws in the context of business is tax policy and administration. Ukraine shouldn’t take Poland as a model in this area, as the eighteen yearly tax-related payments required by Polish entrepreneurs take approximately 286 hours to make. In the Doing Business 2015 report, a gap of 63 countries between Poland and GBS’s leader — Lithuania — in terms of tax administration, (Poland — 87th, Lithuania — 24th) can be observed. In addition, the consulting company TMF Group singled out Poland as a European leader in terms of legal complexity in 2015. Poland stands 7th out of the 81 analyzed countries in this ranking, while Ukraine stands 25th.

The Baltic States experienced the phenomena of the so-called ‘non-Keynesian’ effects, and can be proud of their achievements in fiscal consolidation. Generally, a consensus among economists states that long-term benefits from fiscal consolidation are in a trade-off with short-term deceleration in terms of output growth. Indeed, recent research suggests that fiscal consolidation may contribute to faster economic growth, also in the short term. These ‘non-Keynesian’ effects, have been materialized in the New Member States (NMS), particularly in the Baltic States and during the period of fiscal consolidation related to pre-accession to the EU (1995–2001).

Reduction of public expenditure, especially wages and salaries as well as transfers and subsidies, positively contributes to an increase of the net export, investments, national savings and private consumption, which is confirmed by Rzonca and Cizkowicz (2005). In spite of the enforcement of strict financial policies implied by the EU accession (in 2004), the Baltic States have managed to keep a balance in public finance later on.

The indisputable leader in this respect is Estonia, which has been keeping a one-digit public debt level: the public debt has not exceeded 10% of the GDP in the 2004–2013 period, and stands at 10.2% in 2014 according to the IMF (see Graph. 2). Despite the fact that the financial crisis has led to an increase in public expenditure, the Andrus Ansip’s government succeeded in not increasing it too significantly. Moreover, government expenses were successfully restrained in 2008 and 2009, mainly thanks to dividends and the sale of state-owned assets. Although the other Baltic States failed to hold back public expenditure because of the crisis, they managed to keep it at a reasonable level, preventing it to exceed 40% of the GDP (see Graph. 2).

In contrast, the Polish public debt has been constantly increasing since the end of the 1990s, due to a relatively considerable public sector: the public spending constantly stayed above 40% of GDP for the last 20 years (IMF data). Moreover, the underground economy has been increasing in the same period, as a result of a complicated fiscal system (for example, the VAT Gap in Poland has increased from 18% of VTTL in 2010 to 25% in 2012, 9 points higher than the EU-26 average). Furthermore, the 2014 drop in public debt observed in Graph. 2 was not an effect of a consolidation of public finance, but the result of a discretionary takeover of €35,6 billion from private funds, collected in the private pension pillar system and shifted into public sector, which had the consequence to artificially diminish the pensioners’ public liability. This procedure certainly allowed the government to reduce the public debt, but it also had the effect to postpone the potential public finances reforms, which may seem like an inefficient way to deal with the issue, assertively not worth following.

Poland and Ukraine have a long time cooperation relationship, hence the will from the Polish government and experts to nurture it and to support such an important neighboring country. Nevertheless, Ukraine should add to Poland’s aid recommendations taken from best practices in other Eastern countries (such as the business environment in Georgia, tax administration in Lithuania, or public finance in Estonia), as the recent examples of Polish reforms turned out to be ineffective. As a matter of fact, the success of the Polish economic transformation belongs to the past, as Poland does not present many examples of recent, important, well-implemented and structural economic reforms.

Bibliography:

• Rzońca, Andrzej and Piotr Ciżkowicz. Non-keynesian effects of fiscal contraction in New Member States. European Central Bank, Working Paper no. 519, September 2005.
• Barbone, Luca (dir.) 2012 Update report to the Study to quantify and analyse the VAT Gap in the EU-27 Member States. CASE Network Reports No. 120, 2014.
• Global Benchmark Complexity Index 2014. TMF Group, 2015.
• Doing Business 2015: Going Beyond Efficiency. World Bank Group Report, 12th Ed., 2014.

CASE — Center for Social and Economic Research is an independent, non-profit economic and public policy research institution, established in 1991 in Warsaw.

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