Why Ukraine needs decentralization based on economy, not geography

Author : Oleksiy Kushch

Source : 112 Ukraine

Ukraine still uses the administrative grid, developed during Soviet times thus reflecting the needs of the planned economy of that time, as well as the specifics of the command management system
21:32, 13 June 2019

Open source

The topic of decentralization is the most toxic issue in terms of its criticism. On the one hand, this is one of the few reforms in recent times that has at least partially “lowered” funding from a single redistribution center down to the field. Our officials do not get tired to report on two-digit indicators of the growth of the resource base of local authorities.

At the same time, the efficiency of using these resources leaves much to be desired: in conditions when banks offer deposits of up to 15% per annum, many mayors and heads of local communities prefer to place free resources received as a result of decentralization in banks at 10%, successfully dividing bank "bonuses" with its leadership.

Related: Decentralization becomes feudalization in Ukraine

You can do almost nothing and earn from the resources of local communities about 5% per annum on the free balance of funds when the conditional 2.5% migrate into the pockets of bankers, and the other 2.5% go into the pockets of local "bosses." In parallel, you can even unleash a personal management case as a person who has saved the resources of his native city from inefficient use. So it turns out that the banks accumulate billions of hryvnia free funds, and incinerators begin to be built only when the entire city is littered with debris.

More than 100 countries of the world, which according to the UN report on global investment produce 90% of global GDP, attract investors through active implementation of sovereign industrial policy, which in turn is the basic matrix for the formation of an international investment pool. Investors need predictability and a clear prospect for the development of the real sector of the economy of a country.

There are two main groups of countries in the current global investment paradigm. Developed states that attract investors through high institutional capacity and the high quality of the business environment. These are, so to speak, rigid, stable economies that can offer their legal system to activate an entrepreneurial game, equal conditions, etc. On the other hand, there are labile, unstable developing countries that, even when having maximum internal potential, will not be able to provide investors with attractive conditions for the implementation of business projects across the country. The necessary quality of infrastructure, low level of fiscal pressure, legal security and regulatory simplicity can be provided to investors only in special clusters: free economic zones, industrial and technological parks, industrial sites, port-free zones, energy hubs.

Related: Germany to share experience for Ukraine’s decentralization reform

In this case, developing countries simply have to make a choice: to build equal conditions for investors across the country, and silently watch how competitors go forward, and the epicenters of world growth, like magnets, pull basic human capital out of the country or all offer the system investors a cluster approach, replacing the external labor migration with the internal one and temporarily putting up with the fact that in the next 30-40 years, separate economic zones and/or charter cities might be created, which does not exclude the presence of depressed regions.

But in this system at least human capital will be able to circulate within the country (between these cluster development areas) without leaving the country, and investors will be able to receive precisely the service package and legal protection that they cannot be provided for throughout the country. According to this scheme, all developing economies operate, such as China, South Korea and so on, and even those states that are part of a single highly developed institutional environment, such as Poland.

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That is, Ukraine now has two unequal alternatives: either for another 30-40 years to try to create a unified system institutional environment, or to switch to generally accepted forms of cluster development. If we are talking about developing countries, the first option was a success only in one country - Singapore - due to the application of English law, compactness and geographical position. In essence, this is a cluster country. The second option has been successfully implemented in dozens of world economies.

You can come to Kyiv and talk with the prime minister and even get the help of special investor support groups under the Cabinet of Ministers. But then you have to negotiate at the level of the region, district. And finally, to encounter at the micro level of local communities with the local “self-defense” and the enraged local environmental activists. After a year of hardship and extortion of money at all levels, the desire to invest in Ukraine will disappear.

It turns out that the current scheme cannot provide a single window for an investor to enter the Ukrainian economy, including such a topical question as land allocation. And any new industrialization, be it the Chinese present or the Soviet past is inevitably accompanied by permanent infringement of the rights of local residents.

Related: Parubiy: There should be no ‘special status’ for Donbas in decentralization bill

Unfortunately, no one in Ukraine has elaborated a full-fledged administrative reform, aimed at improving the existing administrative grid, developed during Soviet times thus reflecting the needs of the planned economy of that time, as well as the specifics of the command management system.

Such a complex reform should combine the methodology of the distribution of productive forces (territorial and economic regions) and the modern world-system analysis. At the moment, there are several regional clusters in Ukraine, formed on the basis of various civilization models, which are now being united in a single Ukrainian project. Several "world-economies" have been formed in our country, each with its own "super-city." Lviv in the western part of the country, Odesa in the south, Dnipro and Kharkiv in the south-east, Kyiv in the center. The state links all these "world-systems" into a single "world-economy" and a single country. This is how the theory of the “world-system” analysis of Fernand Braudel works at our micro level.

If we use the world-system analysis of another theorist, Immanuel Wallerstein, we can see that the greatest risk for us in terms of economic stagnation lies in transforming the young market world-economy into a world-empire, when the territories are united only through the center, responsible for the centralized collection of taxes and redistribution in their own interests.

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The policy of decentralization should lead to a completely different result: our still ineffective “world-economy” should gradually be transformed into a single “world-system”. For this, the administrative grid in Ukraine must be reformed on the basis of more efficient and adequate single-tax structures, that is, separate territorial-economic regions, united on the basis of common properties and characteristics.

This works on the example of grouping the Ukrainian regions into three basic territorial-economic regions: Donetsk-Prydniprovia with two large industrial centers (Dnipro and Kharkiv) and also three basic industrial clusters (Azov, Dnipro region, Slobozhanshchyna), Central (Kyiv and Lviv industrial clusters), South (Odesa industrial cluster).

Considering the regional peculiarities of the economy, these TER (territorial and economic regions) require a diversified economic approach and the formation of a multi-vector economic policy for each of them.

In the central region, it is necessary to develop logistics and transport infrastructure to ensure the transit of goods to the EU market. This allows creating innovative and technological clusters, industrial sites, and free economic zones in the central and western part of the country. On the state side, a stimulating policy aimed at strengthening the role of medium-sized businesses is needed.


Related: Tombinski: EU allocates €97 million on decentralization in Ukraine

In this area, new points of innovation growth of the economy should appear and a noticeable strengthening of the role of networks of small and medium business associations in the general structure of output should occur.

Transit logistics and infrastructure will also be actively developed here. As for the Donetsk- Prydniprovia district, methods of state dirigisme and competent protectionism are needed to restore the country's industrial core and enhance the efficiency of the extractive industry. Objectively, the role of big business will be preserved in it, and the investment pool will continue to be formed with the active participation of the state and existing financial-industrial groups. Regarding the southern region, there are significant prospects in the sector of tourism and services, as well as in the creation of free trade duty-free transit zones of the port-franco and trading terminals. To activate regional potential, maximum deregulation and credit incentives are needed.

As for Ukraine’s future "world-system", it is economically feasible to carry out the reform on the basis of the following economic clusters:

Donetsk (Donetsk, Luhansk regions);

Prydniprovia (Dnipropetrovsk, Zaporizhia regions);

Northeast (Kharkiv, Sumy, Poltava regions);

Central (Cherkasy, Kirovohrad regions);

North-West (Volyn, Rivne regions);

Podilsky (Vinnytsa, Ternopil, Khmelnytsky regions);

Prychornomorsky (Mykolaiv, Odesa, Kherson regions);

Carpathian (Zakarpattia, Lviv, Ivano-Frankivsk, Chernivtsi regions);

Capital (Kyiv, Zhytomyr, Chernihiv regions).

Related: EU to allocate €97 million for decentralization in Ukraine, - official

This grid of economic zones corresponds to the principles of building a market economy and the tasks of decentralization. Under such a system, local self-government will be concentrated on the basis of districts, and economic policy will be at the level of regional economic clusters/regions.

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