This three sentence summary provides the high level overview of the economic development policy paper: The document outlines the major economic challenges facing Ukraine, including low purchasing power, high unemployment, lack of investment, declining exports and industrial production, and an excessive shadow economy. It then proposes solutions to address these issues through bold institutional reforms to fight corruption, financial stabilization measures, and actions to achieve energy independence such as introducing transparent natural gas pricing and increasing domestic production. The goal is to unlock Ukraine's economic potential by overcoming these systemic problems through targeted policy changes.

1. ECONOMIC DEVELOPMENT POLICY PAPER
U.S. Caucus in the Parliament of Ukraine
May 2016

2. 1
Economic Development Policy Paper
BACKGROUND
Ukraine has a high potential and exceptional resource wealth: talented and educated
people, scientific schools, industrial infrastructure, European values, fertile soil, comfortable
climate, unique location between Europe and Asia, etc.
However, over the past 25 years, the Ukrainian economy has contracted by 35%.
According to the World Bank, it is the worst result in the world. We have lost a third of our real
GDP, although in 1990 our GDP per capita (PPP) had a better starting position than Malaysia,
Poland and Belarus, and was on the same level as Turkey and Romania.
This unprecedented economic downturn in Ukraine took place in the midst of large-
scale shadowing and monopolization of the economy, technological primitivization of
manufacturing and de-industrialization, deepening of the financial and foreign energy
dependence, flourishing corruption and formation and preservation of an oligarchic and
commodity-based system. Instead, countries that have introduced the economy of
entrepreneurial initiative and innovations, fair market competition and new investment
opportunities, economic output and export of products with high added value, have been
successfully developing. As a result, Ukraine's real GDP per capita (in purchasing power
parity) in 2014 was 8267 USD, which is two times less than the GDP of Belarus, Romania,
Turkey and three times less than the GDP of Malaysia and Poland. Nominal GDP in Ukraine in
2014 was 3083 USD per capita.
Continued policy of market fundamentalism, one-sided focus on deregulation and
privatization as a panacea, "tightening the population’s belts" and fanatical fiscal consolidation
along with regular foreign borrowing and restrictive monetary policy of the National Bank of
Ukraine have conserved the economic model in which Ukraine exports raw materials, low-tech
products with low added value, talent and income earned in Ukraine and imports expensive
energy, finished products with high added value and international financial aid.
As the result of military aggression of Russia against Ukraine, and such dysfunctional
economic and monetary policy since the beginning of 2015, the industry has fallen by 13.4%,
exports of goods from Ukraine decreased by 30.9%, foreign direct investment fell by 3.8 billion
USD, official unemployment rate reached 9.4% (according to ILO), or more than 1.6 million
people.
Ukraine plunged into economic depression, characterized by stable and long-term
negative dynamics of GDP, loss of investment, increasing of debt burden on the budget, the
decline in industrial production, exports, employment, household expenditures, the collapse of
Hryvnia exchange rate and inflationary price growth. Instead of creating new prospects for
development, the country is on the verge of social destabilization, as millions of people fall
below the poverty line, entrepreneurs and young people increasingly migrate abroad in search
of a better life. The situation is increasingly becoming even more critical and complicated due
to military actions in the Eastern Ukraine.
Comparing the situation as is with the real potential, we see a huge gap which can be
ascribed, first of all, to a lack of deliberate targeted economic policy. We need to review the
policy and address the key economic challenges to open up Ukraine’s potential to the fullest.

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Economic Development Policy Paper
ECONOMIC CHALLENGES
The current economic policy has caused the following systemic economic challenges:
1. Low purchasing power. The dramatic threefold fall of national currency greatly
depreciated individual income in Ukraine: average disposable income dropped to $130
per month. This exhausts the economy and destabilizes the social and political situation
in the country.
2. High unemployment rate. Official figure is 9.4%, or 1.6 million people, but real is
even higher than that. Such unemployment rate weakens the economic productivity and
additionally depletes the purchasing power of the population.
3. Lack of investment. Direct foreign investment, as well as local private and public, is
shrinking. Capital investment in future growth dropped to 12% of GDP (compared to
19% in the EU and over 25% in developing countries).
4. Decline in exports and industrial production. As a result of military operations in the
Eastern Ukraine and loss of the Russian market, as well as the lack of the targeted
governmental industrial and trade policy, industrial production decreased by almost
15%, and exports fell by 31%In 2015 (despite the effect of EU autonomous trade
preferences for Ukraine in the framework of the Association Agreement).
5. Financial dependence and macro-financial instability. Mainly due to:
- a negative trade balance over the past 9 years;
- threefold devaluation of the national currency;
- excessive national debt (80% of GDP in 2015; the IMF considers 60% as a
critical maximum), and
- exorbitant national debt interests: 14.8% of public spending in 2016 (the second
largest item).
6. Lack of energy independence and efficiency. Energy inefficiency in Ukraine is twice
as high as in Czech Republic, 3 times as high as in Poland and 5 times as high as in
Singapore. Additionally, Ukraine imports as much as 33% of its energy. This makes
many of Ukrainian products uncompetitive on the international market.
7. Low-tech manufacturing and exports. A low share of manufacturing in GDP (13% in
Ukraine, while 18% in Turkey and Poland, 21% in Slovakia, and 30% in South Korea),
miserable share of high-tech exports (only 6% of total exports against 8% in Poland,
15% in the Czech Republic and 47% in Singapore). This leads to a low value added
created in the economy and, consequently, low social standards in the country.
8. Excessive shadow economy and social injustice. Share of shadow economy exceeds
50%. Consequently, the tax burden falls on the shoulders of the least socially protected
layers of the population - teachers, doctors, soldiers, and now even working retirees.
9. The pervasive corruption in public institutions. Most often, it appears in the courts,
tax administrations, customs, and other executive authorities. Corruption destroys the
trust of public and business in authorities and puts the brakes on the economy.
10. The loss of human capital. For 25 years, the death rate exceeds the birth rate; high
immigration: only in the first half of 2015, 411,000 Ukrainians left for work to Poland,
which is almost 2.5% of the economically active population.

4. 3
Economic Development Policy Paper
SUGGESTED SOLUTIONS
1. Bold institutional reforms and fighting corruption
1.1. Complete reload of the judiciary and prosecutor’s office through re-
attestation and open competition, as well as comparison of official incomes with the
actual assets in possession.
Effects: establishment of the rule of law, restored public confidence in the
judicial and law enforcement system and government in general.
1.2. Public service optimization. Review and optimization of functions,
responsibilities, structure and number if staff. Open transparent competition.
Effects: ensuring effective public administration, restoring trust of the
society in government.
1.3. Establishing personal responsibility for officials and introduction of
public prosecution in criminal proceedings. The introduction of not only disciplinary,
but also a full personal property liability of officials for unlawful decisions regarding
individuals and entities. Providing citizens in courts with the possibility of use of audio
and video evidence of bribe demands.
Effects: real protection of interests of citizens and businesses before the
government and transformation of society into an "anti-corruption prosecutor".
2. Financial stabilization
2.1. Restructuring of public debt of Ukraine through negotiations with
international financial organizations and foreign government creditors of Ukraine
regarding the writing off of a substantial part of the external national and government-
guaranteed debt.
Effects: reduce the burden of government debt on the economy and reduce
spending on debt servicing, release of funds for public investment.
2.2. Liberalization of the tax system, which provides for reduction of the tax
burden, especially on wages; simplification of the administration of taxes; revision and
narrowing of the powers of the state fiscal service. Negotiating a bridge loan to cover
temporary tax revenue decrease.
Effects: improvement of the business climate, legalization of the economy
and widening of the tax base.
2.3. Control of the economic border of the country, which involves
preventing smuggling at the customs by establishing a joint border and customs posts
with neighboring countries and accession of Ukraine to the EU Computerized Transit
System (NCTS), as well as prevention of the outflow of capital from Ukraine through
transfer pricing.
Effects: simplification of customs procedures, elimination of smuggling and
corruption at customs, de-offshorization of the economy and broadening of the tax base,
improvement of the trade balance.
3. Energy independence
3.1. Introduction of the transparent pricing in the natural gas market.
Effects: provision of legal and transparent pricing on the natural gas market,
elimination of preferential treatment of corrupt intermediary institutions and entry of
other players to the market, and lowering tariffs for natural gas for consumers.

5. 4
Economic Development Policy Paper
3.2. Implementation of State program to increase production of natural gas
in Ukraine. Establishing of tax incentives for new extraction and production in the
weakened extraction and geological conditions.
Effects: increase of domestic production of natural gas and full energy
independence of Ukraine from imported natural gas, improving of trade balance.
3.3. Implementation of the State program of large-scale energy
modernization. Development and approval of the appropriate government programs,
including co-financing and preferential loans of energy modernization activities in the
private and municipal sectors. Stimulation of the production of energy from alternative
sources.
Effects: reduction of energy consumption and energy intensity of GDP,
saving of current expenditures of state and local budgets, reduction of energy
dependence on energy imports, improving of the trade balance.
4. The new economic policy
4.1. Establishment of a system of state institutions and mechanisms of
economic development. Enhancing the capacity of the country's transition from decline
and decumulation to investment growth, structural modernization and stimulation of the
economy, including by creating/providing tools such as:
a) Export Credit Agency – a special governmental financial institution that
promotes Ukrainian exports through insurance, guarantees and reducing the
cost of loans for export operations and provides information, as well as
analytical support for exporters;
b) State Bank of Reconstruction and Development – a special financial
institution that is an agent of the government which accumulates international
financial aid in order to provide affordable long-term loans, co-investment in
infrastructure and industrial projects (through public-private partnership as
well);
c) Industrial parks - a tool to attract investment through industrial sites with
ready-made engineering and technical infrastructure and temporary tax
incentives for new production and R&D enterprises.
d) Small Businesses Support Agency – a special state institution (similar to
SBA in the USA) that grants credits to small business on favorable terms,
promotes access to public procurement and provides comprehensive
consulting support.
e) Public-private partnership – a mechanism to guarantee the interests of a
private investor when implementing joint projects with the state or
municipalities.
Effects: provision of the tools for effective, transparent and accountable
accumulation and use of budget funds and international financial support for effective
implementation of economic policy.
4.2. Acceleration of economic growth. Purposeful "warm-up of the economy"
by influencing the various components contributing to GDP growth, namely investment
demand, private and public consumer demand, exports and imports; setting all the
levers of economic policy on "the modernization mode."

6. 5
Economic Development Policy Paper
4.2.1. Investment growth, or increase of gross fixed capital formation, in
order to switch the economy to the mode of modernization, including by:
a) introduction of the effective tax, customs, regulatory and other
investment incentives to attract private investment in new production
(including tax holidays for small businesses; favorable duties for domestic
producers; release of reinvested profits from taxation; industrial parks with
ready infrastructure and tax preferences, lower energy prices for new plants;
additional guarantees for investors under public-private partnerships, etc.);
b) design of the monetary policy aimed to increase the "financial depth" of
real economy (through allocating state budget funds and international
financial assistance to loans for small businesses, new and high-tech
industries; through implementation of state programs of compensation of
interest on loans to small businesses, industrial enterprises, etc.).
c) strengthening of the state's role as an investor who can temporarily replace
private investors until the restoration of trust of the latter (including through
large-scale development and modernization of infrastructure; public
procurement programs for machinery and equipment for domestic production;
public construction programs; projects in public-private partnerships, etc.).
d) essential increasing of the intellectual property rights protection to secure
foreign investor-friendly legal and economic environment and facilitate
domestic innovative high added value production (by, inter alia, securing
effective IPR protection in the Internet, improving IPR registration processes,
reforming the IPR enforcement system, including introduction of specialized
courts and private investigators, securing integrity of the state regulation of
IPR in different industry sectors, etc.).
e) development of competition at Ukrainian markets for ensuring healthy
business environment and encouraging investment (by, inter alia, reforming
the national competition authority, implementing clear and efficient merger
control and concerted actions procedures, providing new rules for
investigation on violation of competition law etc.). The system for preventing
competition violation must be one of the significant direction for competition
development (through publication of competition authority’s decisions,
establishment of methodology for calculation of fines, provision of fair
procedure ensuring rights of parties involved in AMCU cases and
investigations, adoption of fair rules of conduct at respective markets etc.).
4.2.2. Promotion of export of Ukrainian products, including through the
elimination of regulatory restrictions for exporters; state guarantees, insurance
and cost reduction of loans for exports; signing of new bilateral free trade
agreements with countries promising for Ukrainian exports; establishment of
trade rep offices abroad.
4.2.3. Increase of purchasing power of population: not nominally but by real
increase of minimum social standards, combined with a reduction of the tax
burden and large-scale de-shadowing of the economy, as well as with
stimulation of production to prevent outflow of resources from the economy
through imports.
Effects: accelerated rehabilitation of the economy, transition to the advanced
development and improvement of lives of Ukrainian citizens.

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Economic Development Policy Paper
4.3. Accumulation of international financial aid and search for the internal
resources to finance the acceleration of economic development. State promotion of
investment demand, exports and the development of production requires substantial
funding that can be provided through sources such as:
a) optimization of current expenditures of the state budget;
b) overcoming smuggling at customs;
c) effective management of state property;
d) legalization and de-offshorization of the economy;
e) additional taxation of raw material economy;
f) targeted money emission to the manufacturing sector;
g) international financial aid.
It is crucial to attract international financial assistance to the real economy
in the amount needed to create an effective structure of the economy, a modern
Marshall Plan. It is necessary to stop consuming donor funds for the sake of consuming
and to start using it for growth through special institutions of economic development as
other successful countries do.
Effects: resource support of the structural modernization of the economy
and its rapid growth (Economic Revival Plan for Ukraine).
______________________ ______________________
Viktor Halasiuk
Co-chair of U.S. Caucus,
Chair of the Committee on Industrial Policy
and Entrepreneurship
Parliament of Ukraine
Viktor Chumak
Co-chair of U.S. Caucus,
Deputy Chair of the Committee on Corruption
Prevention and Counteraction
Parliament of Ukraine