An uneven recovery: How the economy of regions has changed over the past three years
How economic indicators have shifted over the last three years in Ukraine
Ayear ago, The Ukrainian Week decided to analyze how the country’s economic map had changed after the 2008-2009 financial crisis and discovered that different regions had changed in different ways. Whereas those regions that were affected by the situation on world markets and the structure of the domestic economy saw their indicators go up, compared to 2007, others suffered significant losses. This time, we will try to look at what has happened to various regional economies in Ukraine over the last three years and to compare this to the pre-war situation.
This analysis made it possible to draw a number of intriguing conclusions that change perceptions of the country’s development in the last few years. Interestingly, although the broad-based numbers suggest that its economy is still in much worse shape than it was at the end of 2013 and beginning of 2014, this fact seems not very noticeable, because more than a few regions are already in much better shape, based on a slew of indicators, than they were prior to the collapse of the Yanukovych regime and the start of the Russian war. What’s more, average wages in different regions have not always been in line with other economic indicators over the last three years. In some regions where the economy has picked up significantly since 2014, the average real wage is now even lower than it used to be, while in others, where the economy is doing worse than three years ago, real wages are at a level with 2014 or even higher.
THE ECONOMY FROM A REGIONAL PERSPECTIVE
According to figures from DerzhStat, the state statistics agency, GDP in 2016 was 86.2% of GDP in 2013. However, what has to be taken into account is the fact that for a long time this indicator was being calculated against an inflated baseline because enterprises operating in the occupied counties of Donetsk and Luhansk Oblasts, known as ORDiLO, were still being included, which artificially deflated this indicator. In addition, compared to 2013, the population actually living on territory currently under Kyiv’s control is much smaller than it was in 2013, although DerzhStat still has not begun to calculate separate statistics for ORDiLO. This complicates efforts to determine the per capita dynamics of the country’s economic development. By comparing gross regional product or GRP, however, it becomes clear that most oblasts have improved, and those who have not have slipped only by a few percentage points.
Two neighboring oblasts, Vinnytsia and Zhytomyr, are the growth leaders for the last three years. Their GRP was 6.5% and 6.3% higher in 2016 than it had been in 2013. On a per capita basis, this represents 8.3% and 8.1% growth. Volyn Oblast is close behind with 5.0% growth, or 4.9% per capita. In Kirovohrad Oblast, per capita GRP in 2016 was 2.6% higher than in 2013, while Odesa, Kherson, Chernihiv, Cherkasy, Ternopil and Mykolayiv remained close to 2013 levels, ranging from +0.3% growth to -1.1% slippage. This accounts for 10 of the 25 regions that remain under Ukraine’s control.
In five more oblasts, per capita GRP was 3-5% lower in 2016 than it had been in 2013: Khmelnytskiy at -3.0%, Sumy at -3.2%, Lviv at -4.4%, Zaporizhzhia at -4.9%, and Kyiv Oblast at -5.4%. The next seven oblasts saw GRP shrink by 6-9%: Rivne at -6.0%, Kharkiv and Chernivtsi at -6.7%, Zakarpattia and Poltava at -7.8%, IvanoFrankivsk at -9.0% and the City of Kyiv at -9.3%. The only double-digit decline in GRP was registered in Dnipropetrovsk at -13.1%, Luhansk at -36.5%, and Donetsk at -41.9%. In the case of the last two oblasts, however, this decline is nominal for the reasons offered earlier. For real numbers regarding the eastern territories outside ORDiLO, a different calculation is needed and it would likely show marginal per capita GRP growth.
When looked at in terms of exports, the situation becomes even more striking at the regional level. At this time, DerzhStat figures tend to distort the dynamics considerably, among others because numbers are calculated in dollar terms only, and the dollar strengthened in the last few years relative to most world currencies. For instance,
ALTHOUGH THE BROAD-BASED NUMBERS SUGGEST THAT UKRAINE'S ECONOMY IS STILL IN MUCH WORSE SHAPE THAN IT WAS AT THE END OF 2013 AND BEGINNING OF 2014, MORE THAN A FEW REGIONS ARE ALREADY IN MUCH BETTER SHAPE
if calculate the exports of the EU economic “locomotive,” Germany, in dollars for QIV of 2016, then it comes out 11.6% less than it was three years earlier, whereas calculated in euro, on the contrary, it grew almost the same, 11.5%. In France, applying the dollar to exports for the same period, they shrank by 17.4%, whereas in euro terms they grew 5.4%. Yet neither of these countries considers that its exports have gone down. So given its geographical location and the volume of Ukraine-EU trade as an equivalent for measuring foreign trade volumes, it seems reasonable to use the euro.
So, comparing the volume of Ukrainian exports of goods in euros for QI 2017 and 2014, if Donetsk and Luhansk Oblasts are left out, it grew from €7.92bn to €8.72bn or about 10.1%. Most regions successfully adapted to the situation on world markets. Exports of goods from Vinnytsia Oblast grew by 125%, Ivano-Frankivsk by 83.4%, Ternopil by 54.1%, Chernivtsi by 40.5%, Lviv by 37.3%, Kyiv by 32.4%, Volyn by 30.2%, and Zakarpattia by 25.9%. In six more regions—Khmelnytsk, Zhytomyr, Cherkasy, Poltava and Mykolayiv, and the City of Kyiv— exports grew 10-20%. In Dnipropetrovsk, Sumy and
Chernihiv Oblasts, exports grew 5-9%. Two southerly oblasts, Kherson and Zaporizhzhia, showed a moderate reduction in exports, as did Rivne, the only oblast outside the southern belt: it was affected by a sharp fall in world nitrate fertilizer prices and a loss of competitive edge among Ukrainian producers, which led to a decline in exports of 5.3%. Only four oblasts from the southeastern belt showed a decline in exports of over 10% between QI 2014 and QI 2017: Odesa at 12.9%, Kharkiv at 23.9%, Donetsk at 49.0%, and Luhansk at 85.7%. Again, the decline for the last two was mainly the result of a reduction in deliveries from the occupied parts of these oblasts.
INDUSTRY CRAWLS OUT OF ITS HOLE
Between 2008 and 2015, Ukraine saw a steady decline in industrial output that was only briefly halted in 20102011 while otherwise sometimes even going into freefall. By 2015, according to DerzhStat, output was only 66.6% of 2007 levels and deindustrialization could be seen across the country.
Where things seemed to be picking up pace was in a new industrial belt centered on the Right Bank that emerged after the 2008-2009 financial crisis. The last three years have only confirmed that its presence, expansion and clear shape. And so the industrial growth leaders of recent years, Zhytomyr, Vinnytsia and Ternopil Oblast—whose output grew by 17.3-27.4% over January– May 2017 compared to the same period of 2016—were joined by neighboring Kyiv Oblast, with 13.2% growth, Khmelnytsk Oblast with 9.2% growth, Odesa with 12.5%, Kirovohrad with 4.3%, Rivne with 4.8%, and Volyn with 7.9%. The only oblast that prevents these nine from forming a solid territorial belt is Cherkasy, where industrial output was 5.0% down on last year. Meanwhile, Lviv and Kherson Oblasts are slowly pulling up to the “growth belt” with marginal but nevertheless positive growth indicators compared to the first half of 2014.
The oblasts that border on this industrial growth belt from the south and east—Mykolayiv, Zaporizhzhia, Cherkasy, Poltava and Kharkiv Oblasts—are only 4-5% down on three years ago. The remaining oblasts are generally still down in the 7-14% range. The reasons for these deep declines vary greatly, just as their geography does. For that reason, they encompass both heavily industrial, centrally located Dnipropetrovsk Oblast with -13.2% output, agriculturally oriented far western Zakarpattia with -13.5%, and northeastern Sumy with -11.9%. All the country’s regions developed under pretty much the same conditions over the last three years, yet some saw industrial recovery while others continued to decline significantly. In part, this was due to the excessive number of enterprises in specific sectors that were having a hard time adapting to changes on world markets.
Looking at changes in the volume of industrial output for the entire country minus Donetsk and Luhansk Oblasts, where its dynamics over the last three years are distorted by the occupied territories, then it also turns out that output is not that much lower now than it was in 2014. For instance, over January-May 2014, Donetsk Oblast’s share of domestic industrial output was 17.5%, while Luhansk’s was 6.3%. So the loss of 79.4% of Luhansk output amounted to a 5.0% loss for the nation, while the 53.6%
loss of Donetsk output represented 9.4% nationally. And so, of the 18.6% reduction of industrial output over January-May 2017 compared to 2014, 14.4% represented the losses in Luhansk and Donetsk Oblasts. In this way, the decline in industrial output for the nation as a whole, less these two oblasts in the last three years, amounts to only 4.9%. The steep decline in Donetsk and Luhansk industry is not related to the non-occupied portions of these oblasts and is only registered statistically because the baseline for previous years continued to—unreasonably—include products that were made by a larger or smaller number of enterprises that have long been occupied, simply because the companies continued to be registered in Ukraine for awhile. In fact, industrial output has actually been growing in the non-occupied portions of these oblasts.
THE IMPACT ON WAGES
The faster pace of development of those oblasts in the growth belt centered on the Right Bank does not actually mean greater wealth or a more highly developed economy just yet. It is primarily reducing the gap between these generally depressed regions and those that were once more prosperous. In addition, different levels of economic development and growth dynamics don’t always fully convert into the level of incomes for local residents in a given oblast. Comparing real average incomes, adjusted for inflation. What’s more, the pace and level of growth of the local economy does not always to equate the income level of those living there. A comparison between real average wages, adjusted for inflation, between January-May 2017 and the same period of 2014 shows that wages are generally around 6.2% lower than they were. Nominally, however, the official average wage in Ukraine has grown from UAH 3,400 to UAH 6,800. Still, the situation is very different in different regions. In 13 of them, the average wage, even adjusting for inflation, has already recovered to 2014 levels—in seven regions, this indicator is between -0.8% and +0.6%—or even surpassed them—in another six oblasts, the average wage has grown 2.0%-9.0%. In the other seven oblasts, average wages are currently 2.9-5.5% lower than they were three years ago. In Kharkiv, however, average wages lost 8.6% over this period, in Donetsk and Dnipropetrovsk they lost 10.6-10.9%, and in Luhansk, they plunged 18.3%. However, in the case of Donetsk and especially Luhansk Oblasts, the numbers have to be adjusted for the fact that most of the major urban and industrial centers where wages were far higher before the conflict started are now on occupied territory.
What is particularly striking is that among the trio of leaders for pace of growth in average wages over the last three years, only in one case does it reflect the pace of economic growth, whereas in the other two they grew against a declining economic situation. For instance, in Vinnytsia, real average wages adjusted for inflation over January-May 2017 were up 9.0% over the same period of 2014, in Zakarpattia they were up 8.2% and in Chernivtsi they were up 3.8%. But whereas Vinnytsia was the frontrunner for pace of growth with its Gross Regional Product genuinely growing 8.3%, GRP for Zakarpattia and Chernivtsi Oblasts not only did not show growth but actually suffered a per capita loss of 7.8% and 6.7% over this period. But that did not stop them from being leaders for average wage growth. There are also opposite examples. For instance, Zhytomyr Oblast, which posted per capita 8.1% GRP growth and placed among the top growth figures, next to Vinnytsia, the average real wage, adjusted for inflation, was actually 0.7% less over January-May 2017 than it had been three years earlier. Of course, the difference in average real wages among regions is considerably less than the difference in per capita GRP. For instance, ignoring Kyiv, the average regional wage in the lowest region is 68.3% of that in the highest region, a difference of less than a third, whereas the difference in per capita GRP, again leaving out Kyiv, is more than double that. This is very obvious looking at two neighboring oblasts. In Vinnytsia, per capita GRP is nearly double that of Chernivtsi, whereas the difference in average real wages is only 10.9%: UAH 5,860 vs UAH 5,240.
Why this is so is probably because the public sector tends to have similar wages across the board, regardless of economic indicators or economic trends in a given oblast. Nor is there any differentiation when setting the minimum wage for the private sector. In short, public policy regarding wages does not take into account the economic situation in different areas. The other side of this coin is that average and minimum wages in the oblasts that are economically depressed relative to other oblasts begin to converge, leading to greater unemployment and slowed growth or further economic depression.