a practitioner’s toolkit
By Nathan Smith
Ukraine and many of its neighbours in eastern Europe and the former Soviet Union have made great strides towards functioning market economies over the past 30 years. They have successfully emerged from the structural shocks of the 1990s to take their places as players in the global marketplace. But COVID-19 has shone a light on the challenges that still remain.
Many businesses, and small and medium-sized enterprises (SMEs) in particular, had to close or have fallen into informality (i.e. self-employment) as a result of the pandemic. This will, in turn, impact future tax revenues and social security payments, increasing the existing problems in these areas.
The Ukrainian Government and its neighbours in the region can mitigate the economic challenges and build resilience by increasing the level of formality in their economy. The size of the informal or shadow economy in Eurasian states remains significantly higher than in western economies. In Ukraine, for example, the International Labour Organisation (ILO) estimates that undeclared or informal work accounts for 21% of total employment. This situation is ultimately damaging for both state authorities and small and medium-sized enterprises themselves.
Below, I outline a number of tools which governments have at their disposal to achieve this. These tools are drawn from my experience working in Ukraine, but many are relevant across Central and Eastern Europe.
These different policy tools represent a holistic response to the challenge of SME informality and should, in the medium-long term, drive benefits for both SMEs themselves as well as for government and the economy. Among these benefits:
Realisation of these benefits is starting to be seen across the region. Georgia has seen steady economic growth over recent years, and, as a result of its SME Development Strategy, has made “impressive strides in the operational environment for SMEs.” As a result, it now sits in the top-10 in the World Bank’s Doing Business report for 2020, and its levels of Foreign Direct Investment are higher than those of many of its neighbours. Azerbaijan and Armenia have both taken steps to improve the fiscal situation for SMEs and to facilitate access to finance. And Ukraine is embarking on a new SME development strategy, supported by a new office set up for this purpose.
These positive steps hint at a positive trend in the region, with countries beginning to realise benefits from increased engagement with the SME sector. It is to be hoped that governments will continue their efforts in this area, using a range of policy tools to encourage SME formalisation to the benefit of government, businesses and the wider economy.