08 July 2011

Ukraine - How big is the black economy?

Recently the editor of Forbes magazine, Daniel Fisher wrote in his blog that Ukraine was ranked as 4th amongst the WORST economies in the world.
Forbes used the following method to construct the listing:
We ranked 177 countries according to three-year average statistics for gross domestic product growth and inflation (including the IMF’s 2012 estimates), plus GDP per capita and the current account balance, a measure of whether the country is importing more than it exports.
See the Forbes link here

The 10 worst economies in the world, according to Forbes Magazine are:
1. Madagascar
2. Armenia
3. Guinea
4. Ukraine
5. Jamaica
6. Venezuela
7. Kyrgyzstan
8. Swaziland
9. Nicaragua

Surely it's obvious which one is the odd one out?
So, I decided to do a little analysis myself. Using data from the world bank see here
How on earth can Ukraine be ranked among Madagascar, Armenia, Guinea, Jamaica etc.
Well the basic reason is due to the very low GDP Per Capita in Ukraine. at just USD 2,800.
It is so low it beggars belief. OK I appreciate that apart from Iran, Ukraine has one of the highest populations amongst these other 'worst economies'.
See basic analysis here

So, the basic reason for Ukraine being on the list has got to be due to the low level of reported GDP at just USD 113 bn, plus the problems of the large reduction in GDP since 2009.

All governments try as best they can to manipulate figures to try and report better performance outputs. The reported GDP in Ukraine is clearly no where near the real figures. However, the government cannot report figures from thin air. How can they report a higher GDP if the stats are not there to back it up. Moreover, the IMF are closely watching Ukraine as the country needs approval to draw down the next tranche of IMF funding.

Many commentators suggest that the black economy in Ukraine is at least 50% of the whole real economy. Well, I'm starting to think it's more like 75%. The whole country operates in a 'shadow economy'. Even those closely related to government fail to declare the true state of earnings be it personal or from large corporate groups. The SME sector in Ukraine has practically gone underground. Although the government is reporting increases in tax collection, how many would admit that they are reporting the real state of the economy. Who knows the real state of the economy in Ukraine.?

Here is an indication. Look at the list of the 10 'worst economies' in the world and then think about visiting the capital city of one of these countries. How many of these cities would have:

1. A Bentley Dealership (with a long waiting list)
2. A Ferrari Dealership
3. An Aston Martin Dealership
4. A Porsche Dealership

A few questions:
In how many of these other cities would you see so many Mercedes, BMWs, Lexus and so many new cars on the streets. Plus do you see so many 'western banks' operating in these other cities?
Do you see exclusive restaurants where the prices are higher than in Paris and London?
How many of these other cities have Retail Property Rental prices in the main streets higher than in Western Europe. In how many of the other cities would you see women wearing the latest designer clothes with price tags to take your breath away.


The economy of Ukraine remains a mystery to the many people who try to understand it.

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