At the beginning of this new millennium, regional economies are confronting momentous changes. The globalisation of trade and economic activity is increasingly testing their ability to adapt and maintain their competitive edge. There is a tendency for income and performance gaps to widen between and within regions, and the cost of maintaining social cohesion is increasing. Rapid technological change and greater use of knowledge are offering new opportunities for local and regional development but demand further investment from enterprises, reorganisation of labour and production, more advanced skills and environmental improvements.

Overall, Ukraine’s regions have struggled to regain growth momentum since the global crisis erupted in 2008-09. After contracting through the 1990s, the economy returned to growth just before the turn of the century, and all regions enjoyed a period of positive – and in some cases very strong – growth through 2007. In 2008, the economy more or less stagnated as the world economy slowed, and it experienced a sharp contraction in 2009. The downturn was fairly broad-based – all regions contracted – but it was severest in the country’s main economic centres: roughly half of the output loss recorded in 2009 took place in four regions, accounting for 37% of pre-crisis GDP. This outcome reflected to a great extent the collapse of world trade, which hit major exporting regions disproportionately. This, in turn, underlies to a significant extent the shakiness of the subsequent recovery: export demand has remained muted, and domestic demand growth is constrained by slow credit growth and a lack of room for fiscal stimulus. Ukraine as a whole, as well as its constituent regions, must therefore find a growth model that is less exposed to volatile external markets and yet is not based on an unsustainable growth in domestic credit or government spending.

This chapter looks at regional socio-economic trends in Ukraine since the late 1990s. It begins with a look at the macroeconomic context and then turns to an analysis of regional growth performance, inter-regional disparities and other socio-economic outcomes. This is followed by a look behind the trends and the determinants of Ukraine’s productivity performance, in particular. Specific attention is paid to the labour market, which appears to work poorly, for a variety of reasons. Given an ageing and declining population, tight public finances and limited investment, regional growth in Ukraine depends ever more on productivity improvements.

This chapter examines territorial governance in Ukraine, focusing on the ability of subnational governments to support the implementation of national policies and to provide the local goods and services needed to support economic development and ensure an adequate quality of life for citizens. The chapter pays particular attention to the interplay between three strands of reform – decentralisation, territorial reforms and reforms to the system of intergovernmental fiscal relations – arguing that success depends not on any one reform in isolation but on aligning the three. It also looks closely at the challenges of monitoring and evaluation the quality of public services.

Ukraine’s regional development policy has reached a turning point. The creation of a new State Fund for Regional Development, together with the preparation of a new legislative framework and the formation of new governance arrangements mark the start of a potentially dramatic improvement in the quality of regional policy. This chapter begins with an overview of regional policy in its broader context and a look at past and current policy reforms in Ukraine. It then turns to how Ukraine can improve both the institutional architecture for regional development and the instruments of regional policy themselves. Its overriding theme is the degree to which the success of specific regional policy reforms depends on the government’s success in pursuing its broader programme of reforms to improve the business environment.