State and Business: Partners or Enemies?

Businessman in front of a huge maze
Creative Commons

In 2015, the USAID Leadership in Economic Governance (LEV) Program conducted a large-scale survey of small and medium enterprises (Annual Business Climate Assessment in Ukraine). One of the features of this survey is that entrepreneurs themselves identify obstacles to doing business and reforms they expect from the state.

Apart from the survey of over 1,800 SMEs, the team conducted 10 focus groups and 83 in-depth interviews with experts, representatives of executive authorities and business associations. The aim was to develop an instrument for the annual measuring of the business climate in Ukraine and for tracking its improvement or deterioration.

Analysing the data, we turned our attention to the indicator “trust in public institutions”. Paradoxically, 86% of SMEs believe that the state is an obstacle (56%) or an enemy (30%) and, at the same time, almost as many SMEs, 89%, expect state support. When we asked what bodies represent this obstacle, 75% of businesses could not name them.

Over the past 10 years, the business often complained that the state does not help it – it just creates obstacles and collects taxes. There was a traditional slogan – “The government should not interfere with the business and should let it work”. That is, the state must do something, but what in particular nobody knows, so it had better have a rest. We (the business) will do everything ourselves.

This attitude is rooted in the Soviet form of communication of citizens with the state and in their experience since independence. Recall that the first assessment of Ukraine as “captured state” – “the state captured by corruption at the highest level” – appeared in the late 90s. “Captured state” is when the state interests are replaced by the interests of an official who receives rent from his official position. Over time, the official developed – he had turned into a sort of “collective octopus” who replaced public interest with the private one on all levels. But that’s another story.

During the focus groups with entrepreneurs, we heard about business-state relations that the enemy of business is the “official”, i.e. the point of daily contact between the business and the state. This point is a place for all regulatory procedures necessary for doing business, ranging from business registration to payment of taxes and fiscal monitoring.

We estimate that small and medium enterprises spend on average 15% of their time and about 30 thousand Ukrainian hryvnyas per year. This amount includes official and unofficial payments as well as time spent on following these procedures translated into monetary terms. After calculating the costs per employee, we found out that microenterprises suffer the most. No wonder they are so dissatisfied with the current business climate in Ukraine (only 6% rated it positively).

On the other hand, we asked the entrepreneurs whom they trust the most or whom they would ask for help in solving their problems. Most certainly, business confides in the private sector – lawyers and business consultants. However, there is a high level of confidence – second after the private sector – in local authorities and municipalities.

At the same time, the entrepreneurs hardly trust the central authorities. Disappointed with parties and personalities at the national level, entrepreneurs, as an active social stratum, are ready to resolve issues at the local level. This causes particular optimism in the context of decentralization reform in Ukraine. A good example of this can be Ternopil region where there are 26 active territorial communities. Recently we finished working on Enterprise Development Strategy for 2016-2020 years in collaboration with Ternopil regional administration and local business associations.

According to the principles of public-private partnerships, everything happened as it should happen – with creation of a working group consisting of civil society representatives, business associations, local authorities and experts of USAID Leadership in Economic Governance (LEV) Program. Everybody was able to make suggestions or corrections to the Strategy. We met with the heads of territorial communities of Ternopil region who spoke about the expectations of SME development in the communities. For the final document, we used the new data including the Annual Business Climate Assessment in Ukraine.

Then the draft Strategy was published on the website of the regional administration for discussion and all relevant comments were taken into account. As a result, the region received a high quality strategy document which was presented at the first international investment forum “Ternopil Invest – 2016″ in May 2016. On the forum, local authorities of Ternopil region received many compliments from business representatives.

This story is a success story. It is an example of how mutual trust between business and government ensures the development of quality policy documents. I hope that this cooperation will not stop and that soon there will be examples of successful implementation of this policy. I hope that during the decentralization reform there will be many more of such stories. We will measure again the dynamic of changes in 2016 by conducting a new Annual Business Climate Assessment in Ukraine.

The article was written for online magazine BUSINESS

The article was originally published here: http://www.business.ua/opinions/derzhava_b_znes_partneri_chi_vorogi-347025/

Oksana Kuzyakiv
The Institute for Economic Research and Policy Consulting - Kiev