November 6, 2012

Even China Can't Handle Ukraine

Here is a very interesting story. Chinese businessmen wanted to build a factory in Ukraine. They spent about a year on filling paperwork, getting permits, and bribing government officials. I assume that they have to do the same in China so that their learning curve is pretty insignificant. Then Chinese businessmen told their Ukrainian partners that they need to put their project on hold for couple months. Couple months turned in a full year. When Ukrainian partners contacted their Chinese partners about a status of their joint venture, Chinese partners said that they just finished building the same factory in China. So you can build a factory in China in less time than it takes you to get a permit to build a factory in Ukraine. I knew that Ukrainian bureaucracy is terrible. Now I know how terrible it is to do business in Ukraine for foreign investors. Unfortunately, the story is literally told by the book. Here is the book - the Mystery of Capital by Hernando de Soto. Ukraine's economy must have a significant issue of the dead capital. Many businesses cannot work legally in Ukraine because of extraordinary corruption and bureaucratic red tape.  

So what's happening to the net foreign direct investment (henceforth, FDI) in Ukraine?  The following graph shows that the FDI dropped from a 9-percent to 5-percent share of Ukraine's GDP between 2005 and 2010. You can also see that Ukrainians who work overseas transfer back to their families or friends the amount of dollars that is almost equal to the amount of the net foreign direct investments between 2009 and 2010.

It's also interesting to see how foreign direct investments and international remittances behave during the economic downturn (2007-2009). While the net FDI dropped from 7 to 4 percent share of GDP, the international remittances increased from 3 to 4 percent share of GDP. Please, keep in mind that 1 percent of Ukraine's GDP is $1,3 billion. So the one-percent increase of the personal money transfers is a pretty large raw figure. That's the case when percentage is not impressive as much as raw figure is itself.

You can also see that the amount of the net FDI and international remittances are different from their benchmarks under the Yushchenko presidency and the Yanukovych presidency. Of course, we cannot really compare averages with a single year observation. Let's just agree that the net FDI jumped from 2.6% to 9.1% after the 2004 Orange Revolution when President Yushchenko and Prime-minister Tymoshenko came to power. Since then the net FDI has had a declining trend.


  1. Very good post Leo. It is instructive
    to Americans wanting to do business in

    It also should be educational to but
    will be dismissed by Ukrainians.

    Insiders deny it is issue with getting investments in Ukraine that produce
    jobs. They say just hire Ukrainians
    who know how to deal with bureaucracy.

    That should not be necessary when a
    country needs investments, jobs, etc.

    Make sure you forward this post your
    buddy Roman.

    It should be noted that he has
    chosen Western Ukraine to dwell in.
    He thinks it is because of heritage.

    The area of western Ukraine that
    borders Poland is not the left bank.
    Linguist point to the influence of
    Polish, Prussian, and Lithuanian
    languages on the spoken Ukrainian.

    Those same language influences also
    have an internecine cultural residue
    that is different from the left bank.
    Since your ancestry is left bank you
    may want to visit with your comrade
    to distinguish the cultural differences.

    He claims he does not have time to
    write so the burden would fall on you.
    His interest is limited to ideas
    whereas you can present good economic

    Ed K

    1. Ed,
      I am even surprised that locals are assumed to be able to solve local problems. If it were true, all locals would be doing great. It's not the case. It's all about being on the right team.
      I also agree with you that culture matters for economic and political development. Linguistic pattern is another part of culture. The problem is endogeneity. What determines what?

  2. Hello!

    This is a very interesting article!
    In fact, I'm trying to put my fingers on the bureaucratic process of building a factory in Ukraine but no success...

    Do you have any idea what the process is? and more specifically for a "crop protectopn" factory?

    Thanks ahead for your response!!!

  3. What's a crop protection factory?