Regions in Transition: Ukraine, 2003

8/9/2019 Regions in Transition: Ukraine, 2003

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Olga Mrinska (2005) Regions in transition: New Roles in a Global Economy. Case of

Ukraine, in Frank Eckardt, Dieter Hassenpflug (Eds.)Paths of Urban Transformation. Nr. 5

der Reihe "The European City in Transition", pp157-173, Peter Lang Verlag, Frankfurtam Main

REGIONS IN TRANSITION: NEW ROLES IN A GLOBAL ECONOMY.

THE CASE OF UKRAINE

Olga Mrinska

Kyiv National Taras Shevchenko University

Geographical Faculty, Department of Social and Economic Geography

DFID Ukraine,[email protected]

Abstract

This paper aims to show the differences in the development of Ukrainian

regions: why some regions have managed to find a suitable position in both thenational and international economy and why others are finding it difficult to

preserve or strengthen their competitiveness. It will analyse not only developmenttrends in national and regional economies, but also the impact of the demographic

it ti d th t th f i l it l th d i f i l di iti
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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and active public participation in this process. The countrys historical legacy is

another factor that can play a positive or negative role.

If all this is true at the national level, it is even more obvious at the sub-

national level. Whilst this may not be an issue in small European transition

economies with more homogenous territorial and demographic patterns, such as

the Baltic States, Slovenia or Slovakia, in bigger countries with a large population

and traditionally diverse territorial regions, development is experienced in differentregions with different velocities. This happens not only because of economic and

social reforms, but also the impact of social mobilisation, and wider changes thatalter a regions overall geo-political or geo-economic position. Ukraine provides a

good example of this diversified transition to a free market. Ukraines pattern ofdecline followed by strong economic growth encouraged a situation whereby

development in different regions progressed along very different paths. Though

back in 1989, Ukraine had one of the highest economic potentials in Europe, it has

been ranked as one of the least advanced transition economies in CEE over the last

decade. However, looking at the dramatic pace of economic development over the

past five years, and the many structural changes which have accompanied thisdevelopment, there are reasons to expect that Ukraine may once again strengthen

its position and rebuild this potential.This paper is aimed at showing the diversity in trends of regional

development in Ukraine: why some regions have managed to find a suitable

iti i b th th ti l d i t ti l d h th fi di


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minimum levels of FDI attraction to Ukrainian regions was at a factor of 43. Athird of Ukrainian regions each attracted less than 1% of national FDI, while one

city Kyiv managed to attract more than 35%. Regional disparities began to

increase noticeably from 1999, when the national economy entered a period of

strong growth (the GDP growth rate constituted 9.2% in 2001, 5.2% in 2002, 9.4%

in 2003, and 12.5% in the first 8 months of 2004 SSC). With sustained rapid

economic growth forecast for the next few years, it can be predicted that regional

disproportions will continue to deepen and that social stratification will increase.

Graph 1

Dynamics of some macroeconomic indices

-5

0

5

10

15

20

1997 1998 1999 2000 2001 2002 2003

%


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Some relative economic indices of Ukrainian regions (in %)

Table 1Macro-region/

Oblast

Territo

ry

2002

Popula-

tion

2003

GVA

2002

Ind.

Output

2002

Agr.

Output

2002

FDI

2003

Export

2003

Ukraine 100 100 100 100 100 100 100

Donetsky 8,8 15,1 16,6 28,3 8,4 7,4 27,4

Donetsk 4,4 9,9 12,4 20,6 5,8 6,5 21,5

Lugansk 4,4 5,2 4,2 7,7 2,6 0,9 5,9Carpathian 9,3 12,8 9,0 5,3 11,4 9,0 7,2

Zakarpatska 2,1 2,6 1,6 0,6 2,2 2,7 1,8

Ivano-Frankivsk 2,3 2,9 2,2 1,6 2,6 1,4 3,0

Lviv 3,6 5,4 4,2 2,7 4,6 4,6 2,1

Chernivtsi 1,3 1,9 1,0 0,4 2,0 0,3 0,3

Southern 18,8 15,1 12,9 7,7 15,0 11,3 9,1

ARC 4,5 5,0 3,7 1,8 3,1 3,8 1,6Mykolayv 4,1 2,6 2,3 2,4 3,3 1,1 2,4

Odessa 5,5 5,1 5,3 2,6 5,3 5,4 4,5

Kherson 4,7 2,4 1,6 0,9 3,3 1,0 0,6

Podilsky 10,1 9,0 5,8 3,7 13,0 2,1 2,4

Vinnytsa 4,4 3,7 2,6 1,8 5,7 1,0 1,4

Ternopil 2,3 2,4 1,3 0,6 3,0 0,4 0,3

Khmelnitsky 3,4 2,9 1,9 1,3 4,3 0,7 0,7

P li k 16 9 10 1 6 8 5 0 13 1 4 4 2 6


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from the metallurgical and chemical industries accounting for about 45% of overallexports (SSC, 2003). However, the importance of these sectors is declining,

because their extensive use of resources, environmentally unfriendly technologies,

and products with low value added make them uncompetitive over the long term,

and changes in international markets may accelerate this process. Therefore, if

radical steps are not made to diversify production structures in these regions, they

may suffer severe economic degradation within a few years.

Another peculiar characteristic of Ukraines traditional industrial centres is

that they get only 24% of FDI. This is a consequence of the sector structure ofinvestments, which are mainly directed into sectors such as retail, food industries,

light industry, machinery production, power generation, and the service sectorallof which are generally characterised by quick returns on invested capital. Unless

new investments and new technologies are introduced into extensively depreciatedassets (90% of assets in agriculture and 60% in industry), these traditional

industrial regions will face dramatic development problems in a few years time. Itwould be fair to note here that significant flows of investments are coming to these

regions from Russia, where the type of production and development priorities aresimilar. Another positive factor that attracts Russian investors to these mostly

energy- and material-intensive productions in Ukraine is the low cost of fuel andenergy supply.

Th E t Uk i i i d t b f th bi t hi


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economic terms. Kyiv is also the country leader in productivity rates: though it hashalf the population of the biggest and most industrially powerful oblast (Donetsk),

it has a greater share of national GVA and of some other macro indices.

The Podilsky, Polisky and Carpathian regions are traditionally agricultural

with a low share of industrial output. After a period of deep crisis, over the lastcouple of years these regions are finally experiencing dynamic development in

sectors such as machinery, light industry and the service sector, especially tourism.These sectors are becoming more important in terms of local economic growth and

have in part helped to diminish social tensions by reducing the localunemployment rate. With the exception of Lviv, the oblasts in these regions had an

insignificant amount of both national and foreign capital investments in the 1990s.However, EU enlargement gave them a powerful impetus to develop their local

economy due to the re-location of European industrial capacities. These are borderoblasts, which are experiencing both the positive and the negative effects from the

accession of Poland, Hungary and Slovakia to the EU. The EuropeanNeighbourhood Policy which was presented by the European Commission (EC) in

2003 promotes the further deepening of integration with Ukraine, particularly inthe economic sector and in terms of harmonising policy and social standards.

The Southern region of Ukraine has a mixed structure with a more or lessequal share of industry and agriculture. It is specialised in the maritime complex

and services, especially maritime transport, which is becoming a more important

t f th i l d t I t t l thi i id d 12% f ti l


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Concept, Ukraines population is expected to be about 45 Million by 2015 ( Graph2). At the same time, life expectancy will rise from 74 to 76 years for women and

from 62 to 67 years for men.

Graph 2

Ukraine's population

51,751,3

48

45

40

42

44

46

48

50

52

54

1989 1996 2003 2015Year

Mipeople

This negative tendency can in part be explained by the fact that in the

twentieth century, many millions of Ukrainians lost their lives as a result of twoworld wars, and famines and repression in the USSR in the 1930s, 1940s, and

1950 Uk i l ti h d b d ll d i i th 1960 b t


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R&D centres: Kyiv, Dnipropetrovsk, Kharkiv, Lviv, and Odessa. However, sincethe collapse of the Soviet economic system and the loss of co-operative links with

other former Soviet republics, Ukrainian scientific and educational centres are

struggling for their position in the market economy with little success. The amount

of time required to turn an invention into a concrete product is usually extremely

long and uncompetitive in comparison to other countries. Furthermore, in the

qualified specialists market, supply does not meet demand: the number of

registered unemployed who are graduates of Ukrainian universities increased 2.6

times between 1995 and 2001. There is also a big gap between the demands ofbusiness and the supply from the scientific and educational spheres. In 2002, only

10% of Ukrainian companies implemented innovative activities and products. Theshare of innovative products and services in the gross national output is equal to

7%, while in developed countries this index constitutes between 70% and 90%.

This means that high intellectual potential is not being transformed into economic

strength and does not contribute to an increase in productivity in the Ukrainian

economy.

The consequences of ten years of economic and social crisis include: aconsiderable brain drain; the loss of the most qualified and educated people, who

would otherwise contribute to the increase of the national productivity; and lossesto the Ukrainian economy. According to official statistics there are only 300,000

Ukrainian labour emigrants in different countries. Most of these found jobs in

W d C l E ll h US C d I l ( i l J i h


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among the young, and aggravates drug and alcohol addiction and other healthproblems.

The weakness of social capital, understood as a complex of social

relationships and social networks which play an important role in economic

success both at the micro and macro levels, could be characterised as one of the

limitations of Ukrainian economy at the moment. The collapse of the Soviet

system, whose main characteristic was collectivism, caused a significant decreasein peoples level of trust in collective efforts and strengthened tendencies towards

individualism. In the majority of cases, social networks do not extend beyondones family, relatives and circle of friends. Civi l society as such is just in the

process of formation, and will take many more years to develop fully. Socialinitiatives are still too weak to play much of a role in increasing the transparency

and accountability of power, which would strengthen Ukraines position as a truly

democratic and open state.

Nevertheless, it should be noted that there are significant differences in the

parameters of social capital in different parts of the country. The Eastern and

Southern regions of Ukraine have a higher percentage of Russians in thepopulation, a surplus of qualified human resources, a high level of urbanisation and

an exhausted environment. These regions belonged to the Russian Empire forcenturies and thus experienced an immense centralisation of power and an almost

complete lack of basic human freedoms. The majority of the local population is not

i di Uk i i i i i l k i k i h i


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The implications of transition on the spatial socio-economic development of

Ukraine

Most Ukrainian regions and territories experienced a serious shock during

the transition to a market economy. This was due to losing a considerable share of

their industrial capacities and intellectual potential, a decrease in productivity,

social collapse and the immediate poverty caused by radical structural changes in

the economy. Due to a serious financial crisis, the Government found itself in aposition where there is chronic under-funding in spheres such as science,education, R&D, telecommunications and infrastructure, all of which are

fundamental for development in a modern knowledge-based economy. Nor is theprivate sector yet fully fledged to the extent that it can substantially fund research

and innovation itself, meaning that the number of companies which actually

produce innovative products and services is marginal (only one tenth).

Structural changes to the national economy are not going as smoothly asexpected, and Ukraine is still well behind the majority of Central European states.

Though small and medium scale privatisation has been successfully completed, theGovernment is still struggling to privatise some big strategic companies, and many

sectors are over-regulated by the state, unlike in most developed market

economies. Especially in such strategically important sectors as machinery,

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imperfect judicial system is unable to provide a sufficient framework for settlingcommercial disputes.

The results of the WB Investment Climate Survey in 2002 show that thebiggest problems for businesses in Ukraine are imperfect national policies,

unpredictability in interpreting legislation and regulations, corruption, and anunderdeveloped financial sector. Inconsistencies in the requirements for domestic

and foreign businessmen lead to a multitude of disputes, and the court proceduresare so imperfect that settling these disputes turns into a very lengthy and costly

endeavour. Taxation is another area that remains quite problematic, and thoughreforms are in progress, overall, the situation does little to facilitate business. As a

result, a considerable share of corporate income is not declared, instead circulatingin the shadow economy. Local companies find it much harder than foreign

companies to get loans, which are still quite expensive, and relatively uncommondue to a lack of mechanisms for collateral management.

There are differences, however, between the quality of the businessenvironment in different Ukrainian regions, which explains why both domestic and

foreign investment is scattered unevenly. There are several methods used forclassifying regions according to local conditions. The Regional Investment Rating

prepared by the Kyiv-based Institute of Reforms is one of the most comprehensiveapproaches, since it is based on analysis of five aggregated groups of indices which

h i (1) i h (2) k i f (3) fi i l


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infrastructure. They are not able to use their relative advantages (clean naturalenvironment, location, demographic situation) and have failed to attract much

domestic or foreign investment.

Judging from how the different Ukrainian regions have reacted to social and

economic changes, to movements in the external environment, and to theincreasing openness of national markets, it is possible to distinguish three groups

of regions that have profited most successfully from their situation and havemanaged to occupy comparatively advantageous positions in the national and

international economy.

The first group comprises the biggest cities in Ukraine Kyiv, Donetsk,

Lviv, Odessa, Kharkiv, and Dnipropetrovsk which have a modern economicstructure, well-developed technical, transport, and social infrastructure, and a

network of educational and R&D institutions. Kyiv is a European-class metropolis

and serves as a channel of information exchange with other European and world

metropolises, while the other cities are of regional significance and have activelinks with their neighbours (Poland, Russia, other countries in the Black Sea

region). These cities have high intellectual potential and a rapidly developingnetwork of financial and business-supporting institutions. Investors both from

other Ukrainian regions and from abroad are attracted by their high concentrationof economic activity and their developed social infrastructure, the result of

ffi i f di h h h f d li h i i l h


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hidden subsidies, and tax holidays for particular branches, enterprises or territories(there are several Special Economic Zones and Territories of Priority

Development). This in turn creates rather a negative image of these regions amongforeign investors, who prefer to work in a transparent and justly regulated

environment, with equal conditions for national and international companies.

The third group of regions consists of the Western border regions of

Ukraine the neighbours of the enlarged EU (Volyn, Lviv, Zakarpatska,Chernivtsy oblasts). During the last 13 years, these regions have greatly intensified

their formal and informal economic and social relations with their neighbouringcountries in Central Europe. In this way, standards of living have improved (when

compared to the national average) and social tensions which resulted from thecollapse of the state economy and widespread closures of large enterprises have

reduced. Moreover, these oblasts are currently experiencing an economic boomdue to the toughening of technical and economic requirements and labour

standards in the new EU member states, which has driven up costs. Since 2001,companies have been re-locating from the eastern regions of Poland, Hungary,

Slovakia and other countries to Western Ukraine. The advantages of thisphenomenon are: geographic location, which causes no considerable change to the

production/delivery cycle; a well-developed transport infrastructure; a cheap butqualified labour force; and the potential for expansion in the Ukrainian market,

which is one of the largest in CEE. Steadily rising personal incomes mean


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national level. Being very resource-intensive, the Ukrainian economy has notdeveloped mechanisms to redistribute profits generated from old industries into

more modern (more innovative, competitive and profitable) branches. Deepanalysis of financial flows is required, as is a special approach to the development

of different types of region; this in turn requires the establishment of specific tools

and mechanisms to control regional policy at the national level.

Map 1. GVA per capita in Ukrainian Regions, 2002 (Ukraine=100)

54-75 (13)


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The Eastern oblasts have strong, extensively developed ties with the formerSoviet republics, in particular with Russia, and are quite dependent on them in their

economic development. Though in general, Ukraine is less dependent on themarkets of Russia and the CIS for its foreign trade and turnover with European

countries is increasing, this is still not the case for the Eastern regions, with Russia

providing more than half of both exports and imports . The accession of some CEE

countries to the EU in 2004 led Ukraine to the denouncement of the free-trade

agreements it had previously had with most of them, which has also had a negative

impact on international trade turnover.

Conclusions

At the present time, state practice in Ukraine is not aimed at making radical

changing to economic structure. In fact, it merely complicates the traditionaleconomic system by giving the wrong incentives to low-productive and old-fashioned industries with obsolete and environmentally unfriendly technologies.

This contrasts with an officially proclaimed policy of moving towards aninnovative economy. However, this policy is not yet supported by specific

mechanisms and instruments which might help to stimulate the development ofinnovative, knowledge-intensive industries.


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them to its advantage. Regions also benefit if they can influence these changes both at the local and at the global level. As the global, innovation-driven economy

becomes stronger, countries are less and less able to influence and protect theinterests of their regions. Multinational companies and supranational organisations

have in effect taken part of national sovereignty. For this reason, regions need to

become more independent actors in the world arena, and they need to make their

voice heard. To do so, they must network and work in association with other

regions. Unfortunately, at the current time, Ukrainian regions are still strongly

influenced by old habits, and are waiting to be told what to do by the centre, whenalready they are being expected to act independently. Furthermore, they are still

unaware that it will be necessary to co-operate and share both responsibility andprofits with other regions. Unless such a philosophy takes root in their identity and

in their understanding of the contemporary world, there is little chance that they

will benefit from the global economy, but will instead suffer only the negative

impacts of further globalisation.

Literature:1. Concept of Demographic Development of Ukraine till 2015 (2004). Ministry of

Family, Children and Youth, Kyiv


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Abbreviation:

CEECentral and Eastern EuropeECEuropean Commission

EUEuropean Union

GDPGross Domestic Product

GVAGross Value Added

ICPSInternational Centre for Policy Studies

NBUNational Bank of UkraineR&DResearch and Development

SSCState Statistics Committee of UkraineUSSRUnion of Soviet Socialist Republics

WBWorld Bank


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Regional Human Development Index in Ukraine, 19992001Table 3

Regions/oblasts Human Development Indices Rank of the region1999 2000 2001 1999 2000 2001

AR of Crimea 0.521 0.573 0.569 16 2 2

Vinnytsia 0.572 0.561 0.559 3 4 4

Volynska 0.524 0.502 0.507 13 19 17

Dnipropetrovsk 0.501 0.500 0.480 21 20 24

Donetsk 0.449 0.466 0.431 27 26 26

Zhytomyr 0.502 0.500 0.492 20 21 19Zakarpatska 0.524 0.554 0.547 14 6 7

Zaporizhzhia 0.533 0.514 0.511 11 17 16

Ivano-Frankivsk 0.536 0.527 0.493 10 15 18

Kyiv 0.546 0.530 0.546 8 13 8

Kirovograd 0.492 0.508 0.485 24 18 20

Lugansk 0.452 0.434 0.409 26 27 27

Lviv 0.550 0.536 0.538 7 12 11Mykolayv 0.481 0.470 0.481 25 25 23

Odesa 0.502 0.518 0.485 19 16 21

Poltava 0.579 0.572 0.564 2 3 3

Rivne 0.541 0.474 0.530 9 24 13

Sumy 0.500 0.491 0.470 22 22 25

Ternopil 0.559 0.541 0.541 5 10 10

Kharkiv 0.514 0.544 0.549 18 9 6


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Investment Rating of Ukrainian regions - 2003

Table 2

Region

Results of calculations by groups of indicesRating

score

PositionEconomic

Development

Infrastructure Financial Sector Human Resources Entrepreneurshipand local

governmentScore Position Score Position Score Position Score Position Score Position

AR of Crimea 0,265 13 0,240 16 0,079 9 0,451 3 0,442 8 0,264 11

Vinnytsia 0,269 11 0,298 11 0,016 20 0,451 4 0,367 21 0,251 14

Volynska 0,265 14 0,327 9 0,029 15 0,405 14 0,336 24 0,248 15

Dnipropetrovsk 0,316 6 0,383 4 0,268 2 0,380 19 0,430 13 0,344 2

Donetsk 0,290 9 0,383 3 0,163 3 0,267 26 0,380 17 0,289 7

Zhytomyr 0,186 24 0,166 25 0,012 23 0,354 24 0,293 26 0,176 26

Zakarpatska 0,329 3 0,240 15 0,009 26 0,418 10 0,437 10 0,257 12

Zaporizhzhia 0,358 2 0,355 6 0,058 11 0,404 15 0,443 7 0,301 5

Ivano-Frankivsk 0,269 12 0,247 14 0,040 13 0,410 12 0,309 25 0,231 17

Kyiv 0,297 7 0,232 20 0,126 6 0,465 2 0,436 11 0,283 8

Kirovograd 0,213 20 0,237 17 0,012 25 0,369 21 0,432 12 0,221 19Lugansk 0,197 22 0,187 23 0,140 5 0,285 25 0,375 19 0,219 20

Lviv 0,287 10 0,339 8 0,106 7 0,437 6 0,448 6 0,297 6

Mykolayv 0,258 15 0,369 5 0,053 12 0,368 23 0,482 3 0,279 9

Odesa 0,318 5 0,315 10 0,085 8 0,442 5 0,523 1 0,306 4

Poltava 0,319 4 0,255 13 0,065 10 0,409 13 0,455 5 0,274 10

Rivne 0,230 18 0,187 24 0,012 24 0,379 20 0,367 22 0,206 24

Sumy 0,231 17 0,220 21 0,015 21 0,380 18 0,372 20 0,215 22

Ternopil 0,188 23 0,260 12 0,021 18 0,369 22 0,405 14 0,218 21

Kharkiv 0,297 8 0,451 2 0,142 4 0,424 8 0,477 4 0,335 3

Kherson 0,170 26 0,131 26 0,029 16 0,368 17 0,342 23 0,180 25

Khmelnitsky 0,185 25 0,235 18 0,019 19 0,398 16 0,384 16 0,212 23

Cherkasy 0,242 16 0,208 22 0,039 14 0,413 11 0,441 9 0,236 16Chernivtsy 0,221 19 0,353 7 0,012 22 0,434 7 0,389 15 0,251 13

Chernigiv 0,211 21 0,233 19 0,027 17 0,419 9 0,378 18 0,222 18

City of Kyiv 0,801 1 0,665 1 1,000 1 0,815 1 0,498 2 0,777 1

Source: Institute of Reforms, 2003

Regions in Transition: Ukraine, 2003

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