Outline of the term paper - Personal pages of the CEU

Hulenko Halyna
Reforming the business environment all over the world is a broad agenda but at its core is regulatory
reform. Regulatory burden is especially harmful for SMEs causing barriers to entry and associated
costs of corruption. The objective of this paper is to assess the peak of the efforts to improve
regulatory climate which was realized in revolutionary “guillotine” strategy. This bold reform had
ambiguous consequences and many debates in Ukraine and abroad.
1. Background and concept definitions
1.1. Situation in Ukraine
According to recent indicators published by the Finance and Private Sector Vice Presidency of the
World Bank Group (Doing Business, 2006) Ukraine is ranked number 128 (among 175 countries) in
the Ease of Doing Business Rank. Starting new business takes on average 30 days, includes 17
procedures and consumes 114 % of income per capita. At the same time, Ukraine is in much better
position according to Dealing with Licenses Rank, moving to the 110th position in 2006 and joining
the list of world’s 17 fastest performers in 2006. Nowadays, obtaining a license would take on
average 156 days and include 19 procedures and cost 832,8 % of income per capita. Ukraine still has
bad ranks in getting a credit (159th), registering property (166th) and trading across borders (106th).
Notwithstanding the reforms, the Ukrainian climate is much behind the aggregate level of the OECD
countries and transitional countries. According to the Doing Business (2006), it will take twice as
much time, money and procedures to start business in Ukraine compared to the average OECD
country. Moreover, recent back on of reformative policy with Prime-Minister Yanukovych does not
offer much incentive for domestic and foreign companies to start up companies in Ukraine.
1.2. Why are regulations important?
The majority of a state’s decisions are regulatory in purpose. Executing the function of economic
regulation, the state has power to influence the decisions of economic agents: mostly those
concerning prices, output, sales, number of firms and control quality and investments.
From the end of the 80-ies, when the wave of regulatory reforms came to the agenda of many
countries, policies aimed at deregulation or “good regulation” came into fashion. Deregulation was
realized through the liberation of markets by reducing state intervention in competitive markets by
abandoning price regulation and market entry. Deregulation brought forth a reversal of central and
local normative acts, which limited access to certain economic activities (Weimer et al., 1999).
Based on the experience of the past, many reasons make a good regulatory climate crucial for states
in transition, and particularly for Ukraine. Sound regulations would stimulate economic growth,
attract FDI, decrease shadow economy, and provide fulfillment of the constitutional right to start a
business. First, sustainable economic growth of Ukraine depends on flow of FDI and savings of
households and enterprises. If business operations were to be eased, one-stop-shops were to function
all over the country and licensing for specific types of business activities were more accessible, it
would bring economic growth as proved by the experience of other countries (e. g. Mexico, South
Korea, countries from Eastern Europe).
Second, it is commonly acceptable notion that transparent regulations will stimulate flow of FDI.
Foreign investors are sensitive to countries` positions in Reports of Freedom House, Transparency
International, The Economist and ranks of economic freedom and business environment. I believe,
for Ukraine to be perceived as having an attractive regulatory climate, maturity of regulatory
institutions and procedures are of crucial importance.
Third, modernized regulations would decrease shadow economy. SMEs have to spend large amounts
of time on inspections, licensing and starting a business. The procedures are costly, take a lot of time
and demand the approval of bureaucrats of different levels or voting of committees, which is even
more troublesome. Every move towards result-based and harmonized regulations resulted in SMEs
coming out of “shadow”.
Forth, accountable regulations will provide fulfillment of the constitutional right to start a business.
Previous research (Kampo, 1999) proves that no other professional activity ever suffered so much
from bureaucratic red tape and bribery as entepreneurship in Ukraine. As starting a business is a
constitutional right, it is important that the state in transition makes it possible to realize the right to
start a business. Today, 5.5 m of people work in SME sector, 2 m are registered as entrepreneurs and
there are 300,000 of SMEs in Ukraine, so the problem concerns the rights of large groups in society.
1.3. “Guillotine” as a best practice for regulatory reform
Regulatory reform for the purpose of my research is defined as a thorough reform of judicial
instruments, processes and government credentials which mean reviewing regulatory acts or the
whole regulatory regime and institutions, improving the quality of future regulatory acts (Jacobs,
The “guillotine” strategy offers quick and deep deregulation at all levels. The principle was first used
in Sweden in 1980, after the government found that it became impossible to define the list of
regulations in force, due to the huge accumulation of ministerial and local government rules. The
“guillotine” was implemented in Mexico, Hungary, Korea, Kenya, Moldova, Macedonia, and Ukraine
as well as in other countries. The World Bank and OECD promote regulatory reform among their
members and the “guillotine” strategy as a best practice.
The regulatory “guillotine” operates in the following way. The government establishes the scope of
the guillotine and later instructs all public bodies to establish, by a certain date, lists of their
regulations within the scope of the guillotine. Each regulation added to the list is justified in writing,
using a simple checklist assessing the need for the regulation (the standard Regulatory Impact
Analysis is developed for this purpose). Three reviews or filters are carried out: first, by the
regulator, second, by an independent review group, and third, by stakeholders such as businesses.
Any regulation that fails the tests in the checklist is either rejected or simplified. Very soon, a
centralized list is created of all regulations that pass the tests, which are considered to be in force.
After the deadline, any regulation not on the list is automatically cancelled by a framework legal
decision (the guillotine drops). This is the moment that is a key for understanding the model. The
central and local bodies of all levels cannot hide ineffective bureaucratic rules without justifying them
and reaching consensus with other stakeholders. The list becomes a final registry of all regulations in
force under the scope of the guillotine, and is recognized in law as the legal database of regulations
for the purposes of compliance. The registry should have legal security - no regulation not in the
registry can be enforced against the public. All new regulations and amendments to existing
regulations are entered into the registry within one day of the adoption and/or publication.
2. Regulatory reform in Ukraine: overview.
The story of the regulatory reform in Ukraine exhibits a peculiar fluctuating effect. The reform was
the strongest in times of liberalization, and the weakest ones in more authoritative periods when the
economy was in “manual control”.
Based on the amount of political will, efforts and public attention paid to regulatory reform I divided
it into three stages as there is no literature in Ukraine studying traces of politics in regulatory reform.
The first stage (1998 – 2000) exhibited first attempts to change the situation. During the second stage
(2000 – 2004) further intensification of the reform in legal bases and practices took place. The third
stage was the revolution of the regulatory climate with the “guillotine” abolishment of thousands of
regulatory acts.
2.1. Beginning of the reform: 1998 – 2000
During first 6 years of Ukraine’s independence, the number of licenses demanded increased ten times.
SMEs spent much time on inspections, licensing for specific types of business activities or starting a
business. The procedures were costly, took a lot of time and demanded approval of bureaucrats of
different levels or the voting of committees, which was even more troublesome. To eliminate these
problems a state regulatory agency was created – the State Committee on Regulatory Policy and
Entrepreneurship (SCRPE). The reform was motivated by the alarming indicators – the average price
of fulfilling regulatory rules equaled 22,000 of dollars per year for a medium enterprise, and the
average number of check-ups was 1-2 (!) times per day. This caused stagnation in the development of
business, and smaller income for the budget.
The aforementioned factors, together with pressure from international organizations, made President
Kuchma sign decrees which facilitated the development of SMEs - Decrees “On decrease of
limitations slowing down development of entepreneurship” (1998 ), “On measures for the
deregulation of entepreneurship” (1998). However, the implementation was weak due to active
resistance from bureaucracy and local authorities who might lose incomes from licensing. Another
reason was a low level of unionization of SMEs because of their shadow activities.
2.2. Intensification of the reform: 2000 – 2004
The crash improvements in regulatory reform always came with liberalization. Though it
might seem quite unexpected in Ukraine during 2000 – 2004, the beginning of the second term
brought “Kuchma - II” – formal liberalization. The Prime-Ministers Yuschenko (12.22.1999 –
04.28.2001) and Kinakh (05.29.2001 – 11.16.2002, the leader of the Party of Manufacturers and
Entrepreneurs of Ukraine) were proponents of the reform, which was very lucky for the reform.
During this period, important Decrees of the President and the Cabinet of Ministers were issued. I call
the period the “intensification” because many progressive developments appeared. The mechanism of
filtration of new regulations came into force and RIA became a necessary stage for each act to pass.
The reasons of failure of implementation on the second stage were the next. Bureaucratic
conservatism and low qualification of public servants, which were not capable to perform Regulatory
Impact Analysis (RIA) properly. SMEs didn’t manage to unite efforts effectively to form a monolith
pressure group because marginal costs of legal effective dialog with the state were higher than staying
in the shadow economy. Misuse of authority and corruption in the executive branch (controlled by the
President). Businesses from the Eastern Ukraine received multiple subsidies and “discounts”. Those
related to oligarchs could get rid of competitors by ordering “special” check-ups of their enterprises.
2.3. “Guillotine” strategy used in Ukraine: 2005 – 2006.
2.3.1. Design of the “guillotine” in Ukraine.
In May and June 2005, President Yuschenko signed the decrees “On Liberalization of
Entrepreneurship and State Support for Entrepreneurship” and “On Measures to Ensure
Implementation of State Regulatory Policy” which used the “guillotine” strategy, without calling it as
such. Within a few weeks, almost 10,000 regulations were reviewed and over 55 % slated for
elimination. The “guillotine” summer resulted in the review of 9 340 regulatory acts and 5 184 of
them were declared contradictory to the main bill on regulatory policy. Furthermore, 5 100 regulatory
acts of local government were reviewed and 35% of them were declared contradictory to the main bill
on regulatory policy.
The design of the “guillotine” in Ukraine (key dates and measures) is given below. It shows the timemanagement, the scope of importance and bodies involved which gives clear idea about the process.
It was extremely compressed in terms of time, vast in engaging actors and deep in reforming
legislative base.
Figure 1. (Kampo, 1999) The scheme of
Guillotine in Ukraine.
Design of Guillotine: Ukraine
By June 13th 2005
Central and oblast adminitrations create special groups for analysis of
regulatory acts. Business representatives should make half of the members of
such groups
By June 20th, 2005
Each group makes a
list of regulatory acts
and sends it to the
Ministry of Justice and
By July 20th, 2005
The groups break the lists into three categories:
1) Reghulatory Acts to repeal;
2) Reghulatory Acts to make changes;
3) Reghulatory Acts which stay in force
(with substantiation);
By July 27th, 2005
SCRPE makes expertise of all documents and proposes changes
By August 31, 2005
SCRPE and Ministry of Justice compare the lists with three categories with the
State Register of Normative Acts. The acts which were hidden from analysis
and not guillotined, are automatically repealed!
2.3.1. “Guillotiners” and their contribution to the reform.
President Yuschenko was one of the main lobbyists of the reform, which has been his promise in his
presidency campaign and also a promise on the “orange” maidan in 2004. The majority of activists of
orange revolution were related to business and SMEs. Business was an influential driving force of the
orange revolution by investing money and showing public support. The scale of dialog is immense:
establishment of the Permanent Forum “Government and Business are Partners!” numerous hearings
on the regulatory reform at the Administration of the President and public discussion of the new
Doctrine of the Public Sector.
Furthermore, he local government and bureaucracy were important actors according to the principle
of subsidiarity: they are the “street-level” bureaucrats delivering public goods to citizens. USAID
(BIZPRO) paid special attention to these actors by providing multiple seminars and workshops. The
regions where either business (the Eastern Ukraine), or BIZPRO were active, the regulatory climate
changed radically.
Another contributor, business-associations began to prefer legal means rather than personal
connections as costs of legal dialog became affordable. The period was marked by an increase in the
number and activities of business-associations. Business-associations were a very important agendasetter as feedback from them in post-“orange revolution” Ukraine was very intensive. The obstacles
they met were the lack of governmental capacities (lack of Internet to inform about meeting,
infrastructure). Business-associations participated in combined groups (business-bureaucracy).
International organizations (the World Bank USAID, project BIZPRO, Jacobs and Associates) played
an extremely important role in raising awareness of the problem of bad regulations, preparing
specialists, and making seminars for the bureaucrats, business and NGOs.
2.3.2. Implementation gap of the reform.
Domestic and foreign assessment of the “guillotine” in Ukraine exhibit surprising differences in the
perception of the results. The foreign report (Jacobs, 2006) calls Ukraine’s case a success story, while
the domestic view is closer to failure (Koliushko, 2005).
The reasons why foreign reports approve the case is that the approach they used is formal. That
means that the result is measured in number of repealed normative regulatory acts while in Ukrainian
legal system the laws have supreme power, while only few of them were actually changed.
Another reason is that the private consulting company Jacobs and Associates is designing and
implementing “guillotine” in many countries, and it is more profitable to evaluate the “good” as
success story, because they can sell their services to governments in future.
However, domestic report (Koliushko, 2005) says the “guillotine’s” implementation was formal,
superficial and fragmentary. The reasons are implementation gaps, low executive discipline, change
in normative acts only and short terms of reform.
Furthermore, the vertical structure of implementation (central government - local government) had
many drawbacks at all stages. Often local administrations did not make public projects which had to
be discussed, did not keep to the schedule and preformed RIA formally. The success of such a bold
reform as the “guillotine” depends on administrative and legal strategies combined with political
commitment at all levels (Jacobs, 2005).
Second, low executive discipline is a general disease of transitional countries. Even good initiatives
are often blocked through an ineffective system of public service, an irrational system of
administrative division of territory, poor local government and an unprotected position of
entrepreneurs in relation to the public service system.
The third criticism concerns the limits of the normative acts changes. According to judicial system of
Ukraine, if we repeal normative acts, but leave the old law specified by the acts, the problem with
overregulation is primarily not eliminated.
Forth, the two-month “guillotine” with almost 10 thousand reviewed acts became the fastest
according to time and scale in the world. Compressed time frequently had drawbacks for the quality
of RIA. According to the Ukrainian design of “guillotine”, to review the acts properly and take
decisions on the fate of the acts, the joint government-business groups should have worked 20 hours
per day during one month, which was not likely.
3. Recommendations.
Failures of implementation show that regulatory reform depends heavily on administrative and
judicial reforms and improving the macroeconomic climate. The real constraint in Ukraine was the
administrative strategy, because of ineffective and decentralized regulatory bodies, huge resistance of
Ukraine's powerful bureaucracies of all levels.
1. Further regulatory reform should go hand-in-hand with administrative reform and the reform of
public service. The macro-level factors hindering regulatory reform are:
ineffective system of public service;
irrational system of administrational division of territory;
small revenues of local governments;
unprotected position of the entrepreneurs in relation to the public service system.
To eliminate these obstacles a Concept of Reform of Public Administration (Koliushko, 2005) should
be adopted by Parliament. Recently Ukrainian politicians have been obsessed with coalition building
and budget process, so there was no political commitment to invest in the future, by coming to the
next step of deregulation with repealing laws.
2. The status of SCRPE should be changed. Now it is accountable to the Ministry of Economy,
which it is supposed to control. However, it is important to make the Committee more independent
from administrative pressure. The President supports the initiative to change SCRPE`s status to
National Commission on Regulatory Policy as a corporate body accountable to the parliament. The
realization of this initiative depends on political commitment of the government and “window of
opportunities” for issue to come to agenda.
3. Activity of business-associations should be facilitated. This is possible only when associations and
NGOs see sufficient link between their input and output. Special infrastructure can be developed to
facilitate business involvement – columns in popular business magazines for discussions of projects
of regulatory acts, working forums on web sites of regulatory bodies of all levels.
4. The procedures of business operations should be eased in existing laws. The law on registering
SMEs has to state the declarative principle of registering.
One-stop-shops should function all over the state.
A new Tax Code should provide simplified procedure of taxation for SMEs and the parliament
should not change the tax rates for a budget year.
Develop single normative act with a list of possible licenses and approvals needed to for SMEs`
operation to prevent licensing bodies demand additional documents.
To sum up, the prerequisites of the regulatory reform are administrative reform, the reform of public
administration, political commitment and legal lobbyism of business-associations.
1. Doing Business, 2006. Country Data Summaries. [online:] Available from:
[Assessed 6 November 2006)
2. Jacobs, S., 2006. Effective and Sustainable Regulatory Reform: The Regulatory Guillotine in
Three Transition and Developing Countries. Jacobs and Associates. 10 January. Available from:
[assessed 05 November 2006]
3. Koliushko, I., Tymoshuk V. 2005. Reform of the Public Administration in Ukraine: Projects of
Concepts and Laws. Kyiv: UCIRP. (Реформа публічної адміністрації в Україні: Проекти
концепції та законів / Упор. Коліушко І., Тимощук В. – К., 2005. – 192 с.)
4. Veremko L., 1999. Lustration of the documents. Galyzki Kontrakty. 18 June. (Веремко В.
Люстрація паперів // Галицькі контракти. – 2005. - № 29. – 18 липня. – С. 25 – 30.)
Weimer, D. and Vining L., Aidan R., 1999. Policy analysis: concepts and practice. 3rd ed. N.J. :
Prentice Hall.
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