Economic growth is already a matter of Ukraine’s survival

In the process of post-war recovery, the main role will be played by the volume and nature of investments. Although international partners are ready to support Ukraine, part of the expenses must be borne by the state budget. It will also be necessary to attract private investments, which were few even before the war. How to support the private sector and what role it plays in recovery, we at the Center for Economic Recovery told during the event «Movement of capital. Investments in the restoration of Ukraine». Now briefly about the main thing.

The need for financing

According to expert calculations, after the end of the war, the expenditure part of the budget of Ukraine will increase significantly:

• social expenses (assistance to veterans, pensions) will increase by $8-10 billion;
• the need to maintain defense spending at a relatively high level of approximately $6.9 billion will remain, in the short term defense spending will not decrease to more than 1/3 of spending in 2022.

Thus, for post-war Ukraine to exist, government spending should be at the level of $110 billion against $80 billion in 2021. The need for financing the recovery and modernization of the economy may reach $500 billion within 10 years.

Sources of investment

According to our estimates, Ukraine can count on three sources of investment. Ideally, all of them should be mobilized.

1. Taking into account the international experience, Ukraine can potentially mobilize at least $250 billion in international aid/reparations in the coming years after the victory (for example, the recovery of countries from natural disasters and wars). This aid, together with debt relief, will likely cover macroeconomic and fiscal stability needs, and only partially cover recovery needs. The condition for receiving this assistance will be effective state governance, implementation of reforms and transparency of the process.
2. Attracting $150 billion from the private sector over the next 10 years.
3. State development expenditures at the level of $10-15 billion per year, which for various reasons will not be covered by international aid or private investment.

That is, in one year the expected expenses for recovery will be at the level of $50 billion on average: $20 billion will be international aid, $15 billion will be private investments, and up to $15 billion will be budget expenditures.

Problem with an asterisk

In order to finance the $110 billion in government spending, the size of the economy needs to be significantly larger than it is now. And in order for the state budget to be reduced after the end of international aid programs or the exhaustion of reparations, the total GDP of Ukraine (if calculated in 2021 prices) must exceed $280 billion. Doubling the GDP over the next 10 years must be perceived as a matter of the country’s survival, and not just a question of well-being.

For a significant increase in GDP, it is necessary that the growth rate of the economy is 7% or more per year, and the size of the public sector should be as small as possible. At the same time, assuming state expenditures at the level of $110 billion, their expected size is 75% of the expected post-war GDP. For Ukraine, the level of redistribution of the economy through public finances at the level of 40% can be expedient and realistic.

Thus, the question remains open – at the expense of which the Ukrainian GDP can be increased in a situation when part of the economy is physically destroyed, and millions of Ukrainians are abroad.

Moreover, if we are talking about the growth of the role of Ukraine in the global world, then the Ukrainian GDP will have to increase to more than $400 billion (the current level of the economies of Poland and Turkiye). Instead of pre-war $200 billion or post-war, probably $160 billion. Otherwise, Ukraine will simply remain a poor country with an underfunded social sphere and a weak security and defense sector.

Growth conditions

Doubling GDP is impossible without increasing the level of technological complexity of the economy, while the current trend is the opposite. Compared to developed economies, Ukrainian exports are characterized by relatively low product complexity. Even agricultural products, which in 2021 accounted for the lion’s share of the total volume of Ukrainian exports and have a much lower complexity compared to the agricultural exports of Poland or Germany. In other words, each worker must create the maximum added value.

European integration and deepening of partnership with developed countries will be a critically important process for Ukraine. Ukraine is able to significantly complement the concept of strategic autonomy of the European Union due to the realization of internal potential in key areas.

Despite the fact that Ukraine has or may have significant competitive advantages, the volume of attracted investments remains low due to a number of obstacles. Most of them are administrative and regulatory in nature and can be overcome (court system, corruption, law enforcement, regulatory policy, etc.).

The only way for Ukraine to reduce and eliminate the gap with high-income countries is to create conditions for rapid and long-term economic growth. Its pace should not only be higher than the world average (2.5-3% of GDP), but also the developing countries of Europe, Asia and America (5-7% of GDP).

A key priority for achieving the necessary rates of economic growth for Ukraine is to improve the investment climate:

• the rule of law and high-quality institutions of public administration;
• fight against corruption;
• protection of property rights;
• decrease in the share of state expenditures in GDP;
• freedom of movement of money and financial resources, currency liberalization;
• economic freedom, macroeconomic stability, etc.

The practice of the development of Ukrainian economy, the nature of external threats, the quality of internal institutions, in particular financial ones, requires systemic, deep, synchronous market transformations