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  Macroeconomic performance and policy

  This chapter presents the analysis of recent economic performance and macroeconomic policy that will frame the discussions of structural and regulatory reform in Chapter 2 and of competitiveness, competition and productivity developments in Chapter 3. The main conclusions of this analysis may be summarised as follows: 

  Recent strong growth has been driven in part by factors that are likely to prove transitory, including terms-of-trade gains, comparatively low energy prices and the existence of substantial spare capacity. If Ukraine is to sustain strong growth over the medium-to-long term, it will need to make the transition to a pattern of self-sustaining investment- and innovation-led growth.

  Macroeconomic management has succeeded in keeping debt low and deficits in check, but pension system sustainability presents a serious challenge, and the economy is already subject to a very high level of fiscal pressure. 

  A de facto nominal dollar peg remains the cornerstone of monetary policy. While a nominal anchor served Ukraine well in the aftermath of the 1998 financial crisis, it is now contributing to the volatility of inflation and increasing risks, not least those associated with growing dollarisation.

  The major challenges facing Ukraine as it seeks to embark on a sustainable catch-up path include improving framework conditions for business, reforming product markets to make entry and exit easier, and strengthening competition.

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  Reducing barriers to growth: the role of institutional and regulatory reform
  This chapter addresses the most important structural barriers to growth and investment that must be overcome if Ukraine’s current growth momentum is to be sustained over the long term. It focuses on two aspects of economic governance in Ukraine. The first concerns the basic institutions of Ukraine’s market economy and the framework conditions for business. These remain a major impediment to sustained growth, in so far as they deter investment. The issues here have primarily to do with the instability, unpredictability and opacity of a great deal of public policy. The second set of issues concerns the specific regulatory and institutional barriers to entry, exit and restructuring, which constitute a related but nevertheless distinct problem. One of the striking features of central planning was the extent to which it simply arrested the Schumpeterian processes of creative destruction that drive innovation and structural change in market economies. Unleashing these processes via the creation of efficient mechanisms for entry, exit and reallocation was thus a first-order concern for all transition economies. However, a great deal of Ukrainian government policy since independence has actually served to impede these processes. It is therefore difficult to exaggerate the importance of reducing the barriers to entry, exit and reallocation in Ukraine, which are largely the product of excessive and often ill-administered regulation.
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  Raising the competitiveness of the economy

  This chapter explores the challenge Ukraine faces in maintaining and enhancing its competitiveness over the long term. It begins with an analysis of some indicators of current competitiveness and the trends underlying recent developments. Two major conclusions emerge from this first section: 

  Although Ukraine's current international specialisation compares relatively favourably with its overall productivity level, it is rather narrowly based . Ukraine has revealed comparative advantages in only a limited number of sectors.

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