6 REDUCING MARKET DISTORTIONS FOR A MORE PROSPEROUS UKRAINE government interventions are especially important in sectors that are naturally vulnerable to market failures or anticompetitive practices. As it recovers from the recent crisis, Ukraine can accelerate its economic development by adopting pro-competition reforms that sharpen e昀케ciency incentives. In past decades, the economy has experienced a volatile growth pattern, which expansions driven by favorable terms of trade and large capital in昀氀ows in a context of weak underlying productivity growth, persistent structural bottlenecks, and serious governance challenges. The country’s industrial sector and export structure are resistant to change, and both remain focused on older industries such as steel, machine-building, and chemical production despite their low levels of productivity. Meanwhile, in昀氀ows of foreign direct investment (FDI) have been very modest, especially in export-oriented manufacturing.6 Small and medium-sized enterprises play a limited role in Ukraine’s economy, and larger firms and business groups dominate most sectors—suggesting that competitive, market-driven processes of entrepreneurship, innovation, and productivity growth are not func- 7 tioning properly. Firms’ perceptions of the power wielded by vested interests and the prevalence of cronyism, anticompetitive practices, and discrimination against foreign 昀椀rms further underscore 8 the country’s distorted playing 昀椀eld. Ukraine Su昀昀ers from Persistently Low Productivity, Limited investment, and Shrinking industrial and Service Sectors Weak productivity growth is among the most salient, enduring, and critical obstacles to economic development in Ukraine. During 2000–08, the annual TFP growth rate averaged 6.6 percent, and rising TFP was responsible for over 80 percent of GDP growth. However, the robust TFP growth observed during this period was due in part to rebounding capacity utilization following the sharp post-transition contraction of the 1990s. During the 2008–09 global 昀椀nancial crisis, deteriorating external conditions caused TFP to plummet, and between 2010 and 2016 the annual TFP growth rate averaged just 0.9 percent (Figure 1), well below the rates of most comparable countries in Eastern Europe 9 and Central Asia (Figure 2). Low TFP growth rates have detracted from overall GDP growth in recent years (Figure 3). While signs of a recovery in TFP growth have emerged since 2016, restoring productivity growth to pre-crisis levels and sustaining those levels over time pose considerable challenges. 6 FDI represented 1 % of GDP in January-July 2017. World Bank. 2017. Macro Poverty Outlook for Europe and Central Asia and World Development Indicators. 7 World Bank (2014). Opportunities and Challenges for Private Sector Development. 8 Economist Intelligence Unit (2018). 9 Poland, Turkey, Lithuania, Romania, Moldova, Kazakhstan, Bulgaria, Estonia, Latvia, Croatia, Czech Republic, Georgia.