Services liberalization and productivity of manufacturing firms: evidence from Ukraine

In the 2000’s, services sector in transition countries experienced rapid development due to major regulatory changes. Deregulation allowed new firms to enter the market resulting in rapid expansion of services as a share of GDP. The focus of this paper is on analyzing the impact of those changes on productivity of manufacturing firms. This question has recently received considerable attention due to the importance of services in the global economy and due to the ongoing debates on the Doha Agenda (Hoekman et al., 2010). The literature documents a positive effect of services deregulation on productivity of manufacturing firms in the Czech Republic (Arnold et al., 2011) and in Chile (Fernandes and Paunov, 2011). Still, as pointed out by Francois and Hoekman (2010), works that try to establish a causal link from services to increase in productivity are plagued with the endogeneity problem and with the problem of disentangling the effect of services liberalization reform from the effect of other reforms. We look at the episode of services liberalization in Ukraine in 2001-2007, which was isolated from other major deregulatory changes and was driven by political pressure imposed by trading partners as a precondition for the Ukrainian WTO accession.

We exploit rich data on Ukrainian manufacturing firms, which allows us to construct a firm-specific index of the services use intensity and interact it with sub-sector and timevarying indices of services liberalization provided by the European Bank for Reconstruction and Development (EBRD). We adopt the standard two-stage approach in the literature of estimating the effect of a policy change on productivity (Pavcnik, 2002; Javorcik, 2004; Amiti and Konings, 2007; Khandelwal and Topalova, 2011). At the first stage, we estimate the production function using the Olley-Pakes methodology (Olley and Pakes, 1996), controlling for demand shocks as suggested by De Loecker (2011), to extract total factor productivity (TFP) of manufacturing firms. At the second stage, we regress TFP on the firm-specific index of services liberalization, controlling for the firm-specific heterogeneity and market structure of manufacturing industries. As a new contribution, we also implement a onestage procedure of estimating the effect of the services liberalization on productivity, which takes into account a dynamic effect of liberalization on investment decisions and, as a result, on exit and entry of firms.

Using the standard method, we find that a standard deviation increase in our measure of services liberalization is associated with a 9 percent increase in productivity. The size of the effect is stronger then in previous studies, probably reflecting the fact that the Ukrainian services sector before the reform was less developed than in the Czech Republic and Chile. The effect is stronger for domestic and small firms, which makes services liberalization a very useful tool for local policymakers interested in promoting growth of domestic small and medium enterprises. Allowing for the dynamic effect of services liberalization on current investment decisions and on future productivity further reinforces the effect of services liberalization on productivity in manufacturing industries. We also document the uniformly positive but heterogeneous in size impact of the reform across manufacturing industries.

We find that the effect of the reform is stronger for more aggregated data, reflecting the two sources of increase in productivity at the industry level. First, the reform increases within firm productivity as described in the previous paragraph. Second, the reform leads to exit of low productivity firms and induces entrance of new competitors due to the general equilibrium effect of liberalization (see Olley and Pakes, 1996; Melitz, 2003), which further increases industry productivity.

The structure of the paper is as follows. Section 2 places this study within the existing literature. Section 3 describes progress of the services sector liberalization in Ukraine in 2001-2007 and its impact on the services sector. Section 4 discusses data, methodology and results. Section 5 concludes.

World Bank. Author: Shepotylo, Oleksandr ; Vakhitov, Volodymyr.Document Date: 2012/01/01.Document Type: Policy Research Working Paper.Report Number:WPS5944

Services liberalization and productivity of manufacturing firms: evidence from Ukraine x

Ukraine Zaporizhzhia Energy Efficiency Project

The EBRD is considering providing a €12.5 million loan to finance the installation of new gas engine units for simultaneous co-generation of heat and electricity and the installation of individual heating stations at the building level in the district heating system of the city of Zaporizhzhia in Ukraine.

The Project is designed to increase the overall efficiency of the district heating system in the city of Zaporizhzhia and focus on reduction of fuel consumption. The transaction will have significant demonstration effect for other cities and utilities in Ukraine concerning ways to improve energy efficiency of district heating operations and reduce fuel consumption. It will also increase the penetration of combined heat and power technologies for which there exists a substantial market potential in the country.

Through physical investments and the Corporate Development Support Programme, the Project will improve financial and operational performance of the Company. The Corporate Development Support Programme and other donor funded assistance will provide substantial training for the key staff of the Company enabling substantial market skill transfer. The Client. The District Heating Company “Miski Teplovi Merezhi” (the “Company”), a municipal utility wholly owned by the City of Zaporizhzhia

European Bank for Reconstruction and Development.Country: Ukraine.Project number:42241.Business sector: Energy efficiency .Public .Environmental category:B Board date:26 June 2012 2012.Status: Pending concept review. PSD disclosed:7 Dec 2011

Ukraine Zaporizhzhia Energy Efficiency Projectc

Danone Industria Project.Russia,Ukraine,Belarus,Kazakhstan and Azerbaijan

The Bank co-invested with Groupe Danone in its Russian dairy subsidiary, Danone Industria in 2001as part of a Multi-Project Facility (MPF) (see PSD: http://www.ebrd.com/english/pages/project/psd/2001/1968.shtml). In 2010 the Bank exchanged its shareholding in Danone Industria for a stake in Danone CIS, a holding company that consolidates the subsidiaries of Danone in Russia, Ukraine, Belarus, Kazakhstan and Azerbaijan to support the Danone operations in those countries.

The Bank’s investment is expected to have the following main impact on the transition in the Region: a) Market expansion The Bank is supporting the expansion of Danone’s dairy operations in Ukraine, Belarus and Kazakhstan in addition to Russia where the Bank already co-invested in Danone Industria. The Belarusian and Kazakh dairy markets are still in relatively early stages of their development, with no major local operator able to produce high quality dairy products. Danone’s product portfolio mix remains unique for the region, with a number of strong and affordable brands of children’s yoghurts, yogurt drinks, and desserts. (b) Backward linkages.

Further expansion of Danone’s operations in the region will have a positive impact on the local fresh milk suppliers (with most of them being small independent farms).

European Bank for Reconstruction and Development.Country: Regional.Project number:41758.Business sector: Agribusiness.Public/Private:Private.Environmental category:B Board date:8 June 2010.Status: Signed. PSD disclosed:9 Dec 2011

Danone CIS (f. Project Neva)z

Ukraine: Ex Post Evaluation of Exceptional Access Under the 2008 Stand-By Arrangement

Ukraine faced a severe triple crisis in late 2008. Vulnerabilities had built up for years along several dimensions, but were masked by strong catch up growth and terms-of-trade windfalls. Tumbling steel prices and global demand as well as capital outflows triggered a balance of payments crisis, which also eroded confidence in the currency and the banking system. Despite low public debt levels, a fiscal crisis rapidly emerged on the back of a sharply contracting economy, the realization of contingent liabilities, and the lack of market access.

Ukraine was the third country to receive exceptional access support in early November 2008 under a front-loaded 24-month Stand-By Arrangement. The key program objectives were stabilizing the banking system and facilitating adjustment of the economy. As fiscal gaps emerged, and in view of the existing room under the programmed NIR targets, purchases were used for budget support, which proved critical, together with the currency counterpart obtained from a sale of the 2009 SDR allocation.

Accounting for the difficult circumstances—the need for quick action, little ownership, and weak governance and institutions—the program was overall well designed, however with compromises, for example regarding bank resolution, reflecting the program environment. Although structural conditionality was originally streamlined, reviews relied on an increasing number of prior actions in an attempt to enhance authorities’ ownership and to address the emerging structural issues. Policy cornerstones of the program were measures to stem the banking crisis, a flexible exchange rate, and a significant degree of flexibility in fiscal policy.

Program implementation was difficult against the backdrop of sharp political divisions and weak institutional capacity. Only two of the envisaged eight reviews were completed. The program went off track in autumn 2009, as commitment vanished ahead of the January 2010 presidential elections and fiscal policy diverged further from the program. Nevertheless, the Fund remained closely engaged with the authorities.

Achievement of program objectives was mixed, with core short-term objectives largely met but little progress toward meeting medium-term objectives. The banking system stabilized, the current account adjusted quickly, social arrears and sovereign default were avoided, and a gradual economic recovery started from mid-2009. However, no major shift in policy making occurred and political economy considerations continue to drive policy making in Ukraine.

Efforts to tackle the underlying structural and institutional weaknesses stalled. Bank resolution remained incomplete, the exchange rate regime returned to pre-crisis practices, the energy sector remained largely unreformed with quasi-fiscal deficits widening, and legal and governance reform fell short of objectives. The fiscal costs of the crisis and larger deficits to cushion the downturn have put large strains on Ukraine’s public finances. The key lesson from the EPE review is the importance of ownership and governance but there are no clear-cut answers on how to achieve this in Ukraine. Four signatories of the program, many prior actions, and close IMF involvement—including through significant technical assistance—were only partially successful. Less front-loading of the program may have provided a stronger incentive to follow through with policies but would have to be balanced against the need to secure confidence and adequate financing.

International Monetary Found. Published: November 18, 2011.Series:Country Report No. 11/325. Subject(s): Ukraine

Ukraine: Ex Post Evaluation of Exceptional Access Under the 2008 Stand-By Arrangement