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The Governance of Shrinkage in Donetsk and Makiivka (Ukraine): the Case of Local Government Finance

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The Governance of Shrinkage in Donetsk and Makiivka (Ukraine): the Case of Local Government Finance Work package 5 The Governance of Shrinkage in Donetsk and Makiivka (Ukraine): the Case of Local Government Finance Research report D10 Comparable research report Revised Final Version: 27 April 2012 Vlad Mykhnenko* Katsiaryna Padvalkava Larysa Kuzmenko Myroslava Soldak Dmytro Myedvyedyev *The views expressed are the authors’ alone and do not necessarily correspond to those of other Shrink Smart partners or the European Commission. Comments and enquiries should be addressed to: Dr. Vlad Mykhnenko, School of Geography, Earth and Environmental Sciences, University of Birmingham, Edgbaston, Birmingham, B15 2TT, United Kingdom. Tel: +44 (0)121 414 9129. Email: [email protected]. i CONTENTS List of Figures.................................................................................................................. iii List of Tables................................................................................................................... v 1 – Introduction.............................................................................................................. 1 2 – Local Government Finance in Europe and Beyond................................................... 3 3 – Ukraine’s Post-Communist Transformation, Shrinkage, and Public Finance 10 Trajectories..................................................................................................................... 4 – Local Government Finance in Ukraine: Evolving Governance Arrangements.......... 23 5 – The Budgetary Policy Cycle and Fiscal Flows............................................................ 28 6 – Urban Shrinkage in Greater Donetsk: Fiscal Stress and Governance Response....... 41 7 – Policy Outcomes: Achievements and Failures.......................................................... 58 8 – Urban restructuring in Greater Donetsk: Was There a Lack of Capacity?................ 66 9 – Did Donetsk or Makiivka Experience a Dependence on External Resources?.......... 72 10 – Financing Ukraine’s Shrinking Cities: Contradictions and Instability...................... 77 11 – Urban Shrinkage in the Donetsk-Makiivka Conurbation: the Mode of Governance.................................................................................................................... 81 12 –Conclusions.............................................................................................................. 94 Bibliography.................................................................................................................... 97 Appendix 1. The Constitution of Ukraine of 26 June 1996. Chapter XI. Local Self- Government. Articles 140-146....................................................................................... 106 Appendix 2. Complementary tables............................................................................... 109 ii LIST OF FIGURES Figure 1. General government total outlays as a % of GDP: emerging and developing economies (average), high-income OECD countries, Romania, and Ukraine, 2009.................................................................................................................................. 4 Figure 2. Local government expenditure as a % of consolidated (central + local) government expenditure and of GDP, Ukraine, 1990-2009............................................. 5 Figure 3. Local (regional + local) government expenditure as a % of GDP, selected high-income OECD countries, Romania, and Ukraine 1999-2009.................................... 6 Figure 4. Relationship between the size of the state (general government expenditure as a % of GDP) and the power of local (sub-national) government (as a % of total public spending after transfers), high-income OECD countries, Romania, and Ukraine, 2009.................................................................................................................................. 7 Figure 5. Average levels of fiscal decentralisation and state involvement in the economy in the Czech Republic, Germany, Italy, Poland, Romania, Ukraine, and the United Kingdom, 1990-2010............................................................................................. 8 Figure 6. Ukraine’s long-term population prospects: 1950-2100 (thousands)................. 10 Figure 7. Ukraine’s present population and real GDP trajectories, 1990-2015, volume indices (1990 = 100), and ILO real unemployment rates, 1996-2010, %.......................... 13 Figure 8. Shifting patterns of Ukraine’s local government revenue (excluding transfers), % of total, 1990-2009...................................................................................... 15 Figure 9. Volume change in GDP and public expenditure (local, central, and consolidated government sectors), 1990-2009, volume indices (1990 = 100)................. 16 Figure 10-11. Relationship between natural population growth and total population growth, 1990-2010 (left), and economic growth and total population growth, 1996- 2010 (right)..................................................................................................................... 21 Figure 12. The Soviet Union’s public finance hierarchy, c. 1955-1990............................ 23 Figure 13. Ukraine’s local government finance arrangements, 1991-2001.................... 25 Figure 14. Ukraine’s local government finance arrangements, 2001 onwards............... 26 Figure 15. Territorial levels of decision-making and Ukrainian politics.......................... 27 Figure 16. Governance of public finances: interaction snapshot, 2011.......................... 29 Figure 17: Donetsk and Makiivka city budgets: fiscal flows, 2011................................ 37 Figure 18. Impact of local development budget on territorial socio-economic development..................................................................................................................... 38 Figure 19. Local government finance: revenue and expenditure trajectories, 1990- 2009, volume indices (1990 = 100)................................................................................. 42 Figure 20. Comparative output trajectories: Ukraine (total output), Donetska oblast (industrial output), Donetsk (industrial output), Makiivka (industrial output), and Mariupol (industrial output), volume indexes (1990 = 100), 1990- 2010................................................................................................................................ 49 iii Figure 21. The structure of expenditure of local budgets in Ukraine in 2009, by economic type (%)............................................................................................................ 50 Figure 22. Outlays by functions of local governments in Ukraine, 1999-2009, % of total................................................................................................................................. 59 Figure 23. Average annual unemployment rates (ILO methodology), 1995-2008.......... 64 Figure 24. Ukrainian local government revenues by source, shifting patterns, 1999- 2009, % of total............................................................................................................... 67 Figure 25. Ukraine local government revenues by source in 1999-2009 (constant prices), hryvnia, percentage of total............................................................................... 72 Figure 26 Figure 26. The Donbas Arena, home of FC Shakhtar Donetsk, opened on 29 August 2009...................................................................................................................... 88 Figure 27 Figure 27. A regular phone-in programme with Oleksandr Lukyanchenko, the Party of Regions mayor of Donetsk (2002-present), Donbas TV & Radio Company, 7 December 2010............................................................................................................. 90 iv LIST OF TABLES Table 1. Contemporary demographic indicators: Czech Republic, Germany, Italy, Poland, Romania, Ukraine, and the United Kingdom, ranked by population growth rate, 1990-2010 averages............................................................................................ 11 Table 2. Public finances of Ukraine: the comprehensive budgetary policy cycle...... 30 Table 3. Development budget of Donetsk, 2007, in constant prices.......................... 39 Table 4. The city of Donetsk budget, 2001-2010 (in constant 2007 prices)............... 43 Table 5. The city of Makiivka budget, 2005-2010 (in constant 2007 prices).............. 43 Table 6. Donetsk and Makiivka: own and assigned budget revenues, 2005-2010 (in constant 2007 prices)................................................................................................. 45 Table 7. Inflow of personal income tax into Donetsk and Makiivka city budgets (in constant 2007 prices)................................................................................................. 47 Table 8. Pre-tax profits of local enterprises (in constant prices), million hryvnia............................................................................................... 48 Table 9. Donetsk and Makiivka: spending on wages and salaries, % of total city budgets....................................................................................................................... 51 Table 10. Average monthly wage in Donetsk inner city boroughs in 2008................ 55 Table 11. Primary and secondary education in Makiivka........................................... 57 Table 12. Makiivka city spending
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