ARTICLE | IS THE EU-UKRAINE DCFTA A ‘STIMULUS’ FOR CHANGE?

11 January, 2017
Source: Global Researh

Source: Global Research

The article is written by UDI Associate Maryna Rabinovych.

The following piece explores the influence of the EU-DCFTA on deregulation reform in Ukraine[1]

Introduction

Primary associations in Ukraine did business with ‘uncertainty’, ‘corruption’, ‘the lack of investors rights’ protection,’ and even ‘illegal takeover’. Ukraine provides a lot of opportunity for doing business due to its unique geographical location. High-quality land and well-educated professionals, multiple internal (e.g., the government, civil society organizations) and external actors (e.g., the IMF, the EU) are capitalized upon for improving Ukraine’s positioning the Doing Business rating.

The 2017 World Bank Doing Business report identified Ukraine as a country that has reformed multiple aspects of doing business in the last 5 years[2]. The key areas of improvement included: the reduction of regulatory complexity, the enhancement of minority investors’ protections, and the broadening of shareholder role with the management of companies and expanded court automation[3].

Further improvements of Ukraine’s position in the ‘Doing Business index’ require transparency with the strategies of internal and external actors that seek to facilitate reforms in Ukraine. The following discussion will consider the role of the EU-Ukraine DCFTA in promoting reform deregulation. The ‘power Europe’ debate is used as an analytical lens to argue that the EU’s intent to promote reform deregulation occurs through DCFTA. This view is underpinned by a focus on the EU’s influence in the implementation of such reform deregulation. EU activities are used to evidence such aforementioned dynamics.

 

  • The ‘Power Europe’ Debate

Critical attention has been given to the EU’s international role in influencing the domestic context of third states. This has formed since the successful Europenization of Central and Eastern European (CEE) countries. On the one hand, there are scholars that claim the EU does not have a foreign policy. Ginsbergsuggests:“it is neither a state, nor a non-state actor, neither a conventional international organization nor an international regime”[4]. On the other hand, Delreux and Keukeleire, promote a differing view by claiming that “no other major power in the world – the US, Russia, China – has been as successful as the EU in stabilizing, restructuring, and increasing the welfare of a dozen of its neighboring countries”[5].

Given the EU’s active attempts to position itself as a key promoter of global values in a broad range of countries, its power is predominately conceptualized through the international relations lens. Duchene (1973) introduced the concept of “civilian power” Europe, which was then further developed by Maull (1990). ‘Civilian power’ refers to a set of peculiarities formed by European Communities’ Members in the domain of international relations:

  • Reliance on economic, diplomatic and cultural policy instruments (instead of the traditional relational foreign policy instruments)
  • Refusal from military instruments of securing international goals
  • Acknowledging the need to cooperate with others on the international arena
  • Developing supranational structures to tackle common challenges[6]

On the other hand, J. Nye conceptualizes the EU’s foreign activities as ‘soft power.’ They suggest the EU holds “an ability to influence others via co-optive means” (e.g, framing the agenda, persuasion, developing an attractive image) as a key to the modern power debate.[7]

In turn, I. Manners (2002) offers a concept of the EU as ‘normative power Europe’ (NPE). Manners view finds “an ability to define what passes as ‘normal’ in the world politics”[8].In this sense, the EU is believed to have a special claim as a normative power. It positions itself as a successful peace project and a “Community based on the rule of law.”

While the NPE focuses on the Union’s ability to influence norms in international politics and third countries, the rather recent concept of ‘structural power’ suggests the EU has the “ability to shape political, legal and socio-economic structures in third states”[9]. Such analytical lens provides insight with the EU’s structural efforts in a third state:

  • Policy objectives
  • Policy outputs (instruments, budget)
  • Actual implementation
  • Outcomes

Contrary to the above concepts, the concept of “transformative power Europe” remains ambiguous. In my Long Paper on the transformative power of the EU-Ukraine DCFTA, I identified the “transformative power” of EU involved: “ability to influence a shift from command to market economy and the creation of genuine democracy and the rule of law in a target country, emphasizing structures and using solely non-coercive means”.

The operationalization of ‘transformative power’ is useful for the understanding the following issues:

  • The EU’s intent to assist a third country to undergo a transformation
  • The intent’s reflection in specific legal and implementing instruments
  • Tangible changes in third countries
  • The EU-Ukraine DCFTA – An Overview of the Agreement and the Major Dimensions of its Implementation

The Deep and Comprehensive Free Trade Agreement (DCFTA) represents a part to the broader EU-Ukraine Association Agreement. It is also one of the crucial incentives for the transformation of the economic system of Ukraine. Importantly, the DCFTA was envisioned as superseding traditional agreements by providing for a mutual reduction of tariffs. Apart from the elimination of tariff barriers to trade, the EU-Ukraine DCFTA:

  • Provides for the compliance of technical regulations, as well as sanitary and phytosanitary [10] measures
  • Opens up an array of new opportunities for the Parties in the field of public procurement
  • Contains chapters related to the cooperation in the fields of intellectual property, trade-related energy issues, competition policy etc.

The DCFTA entry into force occurred on 1 st January 2016. The EU presented it as providing Ukraine with a novel opportunity to” stabilise, diversify and develop its economy to the benefit of all its citizens”[11]. According to the estimations of the European Commission, the application of the DCFTA involves 6 percent GDP increase in the interim, and a further 12 percent increase in the long-term[12].

Apart from the EU’s adoption of the major DCFTA commitments, the implementation of DCFTA includes a range of enablers for the transforming processes in Ukraine. These aspects are inter alia:

  • Legal approximation across a significant body of economics- and trade-related legislation
  • Inclusion of commitments in the domains of administrative and institutional reforms (including the reform of deregulation)
  • EU support for the above changes, realized through financial and technical assistance projects

Serving as one of the envisaged ends of the DCFTA implementation, the improvement of the regulatory environment in Ukraine simultaneously serves as a prerequisite for the intensification of the EU-Ukraine trade relations. However, the rationale for the EU’s support of deregulation reforms in Ukraine exceeds the sole purpose of intensifying trade relations between the two countries as it can be traced from the next chapter.

  • Analyzing the transformative power of the EU-Ukraine DCFTA

Intent dimension

Why is the EU interested in promoting the improvement of the regulatory environment in Ukraine? The regulatory environment in Ukraine is underline by “matters for the EU in security and stability terms”. There is a strong junction between security and stability on the one hand, and economic development, on the other. Therein, the EU’s interest in stabilizing Ukraine serves as the basis for countering factors that cause Ukraine’s economic underperformance.

At the same time, the EU’s aspirations to play a greater role in the international arena and promote its values worldwide, requires the amplification of success stories. Subsequently, quality support for economic development in a “contested Neighborhood” can be seen as an ideal success story to improve the image of the EU worldwide. However, this is affected by simultaneous challenge of Russia’s dominance in the region. Lastly, the EU is the main advocate for deregulation in Ukraine. It seeks to ensure the smooth implementation of the DCFTA reaching order to achieve its multiple aims. The synthesis of the EU official documents and papers by analytical bodies[13]distinguishes the major issues the EU tries to counter in Ukraine through the deregulation include (but are not limited to):

  • Wide-spread corruption and the lack of transparency
  • The lack of capacities of small and medium-sized enterprises
  • Inconsistent harmonization of Ukraine’s business legislation to acquiscommunautaire

In summary, deregulation reforms are an integral part of the Union’s efforts to boost economic development in Ukraine. This depends on a range of instruments, including the DCFTA.

The mode of the reform’s implementation

The EU influences the implementation of the deregulation reform in Ukraine in a number of ways.

First, the EU-Ukraine bilateral agreements (the EU-Ukraine Association Agreement, the EU-Ukraine Association Agenda) contain a number of the deregulation-related commitments of Ukraine. Among them is the reduction of excessive regulations for SMEs; conducting SMEs policy, based on respective European standards; harmonizing Ukraine’s legislation with acquis communautaire in the field of company law, accounting, the protection of minority shareholders etc.

Second, the above bilateral agreements serve as a basis for the development of Ukraine’s domestic framework legislation on deregulation (e.g., the Agenda on deregulating business activities, the Agenda on the implementation of the EU-Ukraine Association Agreement).

Third, the EU-Ukraine Association Agreement includes enhanced conditionality clauses. The EU includes the ‘dialogue and cooperation on domestic reform and ‘cooperation on justice, security and freedom’ as essential elements of the agreement for the purposes of designing conditionality. Such dialogue differs from the vast majority of the association agreements with third states. Thus, the government’s failure to implement domestic reforms may lead to the suspension of the Agreement in case the conditionality clause is invoked. The Agreement also includes a new mechanism for “market access” conditionality. The mechanism enhances Ukraine’s chances with accessing the Single Market, which hinges on the progress of legislative approximation.

Fourth, the EU promotes the involvement of various stakeholders into conceptualizing and monitoring the reform process, using diplomatic means, and providing funds to the reform-oriented NGOs. Thus, differing from previous reforms, the ongoing deregulation exercise is characterized by the combination of the top-down and bottom-up approaches. The major avenues the NGOs or the representatives of business can use to contribute to the reform design and the monitoring of its implementation include:

  • Common working groups, facilitated by the Deregulation Office in terms of the Ministry for Economic Development and Trade
  • Thematic forums
  • Participation in discussing draft laws under the umbrella of relevant parliamentary committees

Fifth, the EU also directs its efforts toward developing the capacity of SMEs, along with empowering the reform-oriented part of Ukrainian civil society. This approach includes a range of instruments, such as Eastern Partnership SME Flagship Initiative and the DCFTA Facility for SMEs.

The Union promotes the application of innovative methodologies of deregulation, such as the creation of regulatory tress. It does this by supporting the activities of the Better Regulation Delivery Office, the leading deregulation platform in Ukraine, and conducting ‘rolling reviews’ of activities. Special indexes are used to assess the progress.

To conclude, the EU’s multifaceted support for deregulation reform in Ukraine determines multiple features of the changes. These are: as the development of strong links to external incentives and monitoring; result orientation; involvement of multiple stakeholders; and the application of innovative methodologies and extensive media coverage.

What was reached? The impact

The joint efforts of multiple stakeholders (state bodies, civil society organizations, the representatives of business led to a range of successes in the following dimensions (in general terms, notwithstanding the achievements within specific sectors:

  • Public services
  • Reduction of the number of permits, authorizations and checks
  • Protection of business interests

Public services

June 2015 flagged the introduction of a new unified web-portal of public services called igov.org.ua. By the end of 2015, the Ministry of Interior made it possible to obtain 72 services for citizens and 47 services for business online. By the end of 2016, one third of all the public services, delivered by the Ministry of Interior, will be available online. Since the launch of the deregulation reform, a number of e-services also started to be available online from the website of the Ministry of Justice of Ukraine.

Reduction of the number of permits, authorizations and checks

It is important to note the progress achieved in terms of implementing the Agenda on deregulating business activities in Ukraine. According to the information of the State Regulatory Service of Ukraine, almost one hundred out of the planned 131 changes were implemented, during the first half of 2016. The most significant changes were introduced into the Law of Ukraine “On licensing different types of business activities” No 222-VIII. They include:

  • Simplifying the procedures of getting licenses in the three key areas of business, namely food and drinks, energy and agriculture
  • Reducing the number of the licensed types of business activities from 57 to 30
  • Providing for termless licenses for some types of businesses
  • Creating a unified electronic database on licenses

As of 2015, the new Law of Ukraine “on amending some legal acts of Ukraine as regards simplifying the conditions of running business (deregulation)” attempted to abolish sixteen authorization-related documents. It also shortened the period necessary to launch a new business. Accompanying changes included:

  • Reducing the number of state institutions, authorized to issue licenses and certificates
  • Reform of the procedures of sanitary and phytosanitary control
  • Simplifying Ukraine’s participation in the international banking services
  • Officially registering the systems of international payments in Ukraine

The protection of business’ interests

Apart from improving the availability of public services to the different categories of stakeholders, the Ukraine government took several steps to improving the protection of business’ interests. In particular, the Ministry for Justice of Ukraine supported launching the Сouncil of Business Ombudsman, while the position of the Commissioner for Entrepreneurship commenced at the State Fiscal Service of Ukraine. Moreover, and special legislation on the protection of minority investors was adopted.

Challenges

Despite the number of evident successes with the deregulation reforms, the analysis of the reform’s implementation highlights key challenges for the nearest future. They include:

  • Сonducting a comprehensive tax reform with a special emphasis on fiscal decentralization
  • Ensuring the mechanisms of contracts’ enforcement
  • Improving the efficiency of bankruptcy procedures
  • Ensuring the accessibility of construction permits and electricity etc[14].
  • Summary

The analysis showed that changes to deregulation reform in Ukraine, were conditioned by the EU-Ukraine DCFTA as a form of transformative power.

The EU has a complex intent in supporting the deregulation reforms of Ukraine. These were mainly determined by Ukraine’s importance for the Union’s security and stability concerns in the region, the EU’s global aspirations, as well as the need to implement the ambitious EU-Ukraine DCFTA.

The mode of the implementation for deregulation reform was significantly influenced by the EU policies. First, the deregulation reform was envisaged as obligatory for Ukraine under the EU-Ukraine Association Agreement and Agenda. External incentives played a crucial role in shaping the scope of the reform and the procedure of its implementation. Second, the link between the approximation of Ukraine’s legislation to acquis communautaire, and the ongoing reform, provides the orientation of results and technocratic reform features. These effects are strengthened through the Union’s application of an enhanced conditionality model and elaborate monitoring procedures.

The EU’s strong support for the reform-oriented NGOs led to the multiple advantages for the reform process, such as ensuring its inclusiveness, critical perspectives and the application of innovative methodologies. The creation of specific bodies, functioning only in the field of deregulation also enhanced the reform’s comprehensiveness and its coverage in various media sources.

A year of the reform’s implementation resulted in a number of achievements related to the accessibility of public services. These included the reduction of the number of required permits, authorizations ad checks, as well as the protection of business interests. Despite challenges, the formation of a progressive deregulation reform team, comprehensive nature of the reform, application of modern progress and compliance measurement tools, and the orientation on international business ratings represent the trends, all reflect the significant transformative power of Ukraine’s European aspirations in general, and the EU-Ukraine DCFTA in particular.

[1] A synopsis of the Working Paper, published by the author in CES Working Papers Series (2016, Vol.VIII (2), pp.269-288), available at: http://ceswp.uaic.ro/articles/CESWP2016_VIII2_RAB.pdf [accessed 29 September 2016].

[2] See: Doing Business 2017 Report, available at: http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-Reports/English/DB17-Report.pdf [accessed 20 October 2016].

[3] Ibid.

[4] See: Ginsberg, R.H. (1999), “Conceptualizing the European Union as an International Actor: Narrowing the Theoretical Capability-Expectation Gap”, Journal of Common Market Studies, Vol.37, No.3, pp. 429-454.

[5] See: Keukeleire, S., Delreux, T. (2015) Сompeting structural powers and challenges for the EU’s structural foreign policy” Global Affairs, 1(1), pp.43-50.

[6] See: Duchene, F. (1973), “The European Communities and the uncertainties of interdependence”, in: Kohnstamm, H. and Hager, W. (eds.) A nation writ large? Foreign policy problems before the European Community. London: McMillan Press, pp. 1-21; Maull, H.W. (1990), “Germany and Japan: the new civilian powers”, Foreign Affairs, Vol. 69, No.5, pp. 91-106.

[7] See: Nye, J.S. (2011), The future of power, Public Affairs, New York, USA.

[8] See: Manners, I. (2002), “Normative power Europe: a contradiction in terms? ”, JCMS, Vol. 40, No.2, pp. 232- 258.

[9] See fn. 3.

[10] The term ‘phytosanitary’ refers to the control of plant diseases, especially with regard to agriculture.

[11] See: European Commission (2015), “Commission implementing decision of 23 April 2015 on the Special Measure 2015 for private sector development and approximation in favor of Ukraine to be financed from the general budget of the European Union”, available at: http://ec.europa.eu/enlargement /neighbourhood/pdf/key-documents/ukraine/20150521-special-measure-2015-for-private-sctordevelopment-and-approximation.pdf [accessed 7 July 2016].

[12] Ibid.

[13] See: Langbein, J. (2012), “Implementing Deep Free Trade between EU and Ukraine – time for a new approach”, IEP Policy Brief on Enlargement and Neighborhood, No 3, pp.1-5; International Center of Policy Research (2015), Deregulation reform: the analysis of state decisions, ICPR, Kyiv.

[14] The challenges are distinguished, based on the interviews with experts, see: Erashov, A. (2016), “Ukraine has to adopt 22 laws to improve its positions at the rating ‘Doing business 2017’ ”, available at: http://www.hromadske.tv/economics/ukrayina-maye-priinyati-ryad-zakonivshchob-pidnya/ [accessed 7 September 2016]; Fedorin, V. (2016), “The parade of reformers: how to create the market of land”, available at: http://nv.ua/opinion/fedorin/smotr-reformatorov-kak-sozdat-rynok-zemli-111165.html [accessed 7 September 2016].

 [MV1]Need to reference this term