Not bad, but could be bet­ter

Ukraine's econ­omy has nearly re­cov­ered to pre­war lev­els, but for it to go into higher gear, there needs to be a se­ri­ous a shift in pol­icy pri­or­i­ties

The Ukrainian Week - - CONTENTS - Olek­sandr Kra­mar

De­spite the steady stream of nega­tive talk about the state of the do­mes­tic econ­omy—which ap­pears to be mainly driven by the ap­proach of the next round of elec­tions—, its re­cov­ery is steadily pick­ing up pace. Over QI’18, GDP rose 3.1% com­pared to the same pe­riod in 2017—one of the best in­di­ca­tors in the last seven years. In­deed, since 2011, Ukraine’s econ­omy grew more quickly only in the last quar­ters of 2013, at 3.3%, and 2016 at 4.6%, in both cases driven by ex­cep­tional har­vests. For the first hal­fyear, which is less de­pen­dent on crop results, there has not been a bet­ter pace of growth in th­ese seven years.

On one hand, this pace of growth is hardly enough to pull a coun­try as poor as Ukraine to­day out of its slump. To achieve a break­through from the third world to the first in a short time­frame and be­come a de­vel­oped coun­try, Ukraine needs to post dou­ble-digit growth for a solid pe­riod. Yet, how much can be ex­pected when nei­ther those in power nor their key op­po­nents are aware of, let alone un­der­stand, the need for car­di­nal changes in their pol­icy pri­or­i­ties that then need to be sub­or­di­nated to the goal of eco­nomic growth. Both groups are fo­cused on a pol­icy of ac­cu­mu­la­tion, on the many ways to re­dis­tribute the national pie, from so­cial pop­ulism to anti-cor­rup­tion ac­tiv­i­ties, and not on in­creas­ing that pie. Given this, it’s hard to imag­ine how Ukraine might reach a break­through pace of eco­nomic growth.

On the other, it’s sim­ply danger­ous ma­nip­u­la­tion to con­stantly be­rate the cur­rent ad­min­is­tra­tion and moan that, be­cause of the Rev­o­lu­tion of Dig­nity, “pro­fes­sional man­agers” have been side­lined from govern­ment and “tra­di­tional eco­nomic ties” with Rus­sia have been rup­tured, that the coun­try’s econ­omy has suf­fered “a ter­ri­ble col­lapse that has re­duced it to barely half of what it was, and that climb­ing out of this pit at the cur­rent pace will take at least 15-20 years.” The ar­gu­ment then goes that Ukraine should back­track, re­ject painful re­forms and the move to­wards an unpredictable fu­ture. This kind of think­ing ex­ploits out­dated stereo­types that many Ukraini­ans still be­lieve in, push­ing them into de­spon­dency and fos­ter­ing dis­torted no­tions about the path to re­newal and growth.

ELIM­I­NAT­ING DIS­TOR­TIONS

First, all th­ese state­ments about the “un­prece­dented eco­nomic col­lapse” of the last few years is a myth un­der­pin­ning po­lit­i­cal agen­das aimed at the masses and sta­tis­ti­cal ma­nip­u­la­tions aimed at spe­cial­ists. Po­lit­i­cally, com­par­a­tive fig­ures of Ukraine’s GDP pre­sented in dol­lar terms, mak­ing 2016 re­ally look barely 50% as 2013, and 2017 barely 66%. But the fact is that the nearly twice-larger GDP of 2013 also in­cluded the now-oc­cu­pied ter­ri­to­ries of Crimea, Sev­astopol and parts of Donetsk and Luhansk Oblasts that once pro­duced most of the re­gional out­put.

Se­condly, dol­lar-based GDP shrank in many coun­tries of the world af­ter 2013 as the US cur­rency sharply strength­ened in re­la­tion to most other cur­ren­cies and most in­ter­na­tion­ally traded goods. As a re­sult, even coun­tries whose economies had been grow­ing steadily in the pre­vi­ous few years saw their real GDP go down in dol­lar terms. For in­stance, Poland’s real GDP over 2013-2016 grew 10%, but its dol­lar value fell 10%. Over that same pe­riod, Ger­many’s real GDP growth comes out as a de­cline of 7.5% when cal­cu­lated in dol­lars. France, too, posted a 12% de­cline in dol­lar terms, but its real GDP grew 3.2% (see The dol­lar ef­fect).

Among Ukraine’s post-soviet neigh­bors, the ef­fect of the ex­change rate on GDP growth was even stronger—and not that dif­fer­ent from Ukraine’s. For in­stance, the Rus­sian Fed­er­a­tion posted a 2% de­cline in real GDP over 2013-2016, but in dol­lar terms, it was down 42% in 2016, com­pared to 2013. Sim­i­larly, Be­larus’s GDP went down 4%, but in dol­lar terms it was down nearly ten times more—37%. Con­sid­er­ing that Ukraine lost part of its ter­ri­tory over this pe­riod, its per­for­mance was not very dif­fer­ent from ei­ther of th­ese neigh­bors. In short, rep­re­sent­ing eco­nomic growth in the US dol­lar or any other cur­rency is an in­di­ca­tor that can some­times sharply rise or fall with­out re­flect­ing ob­jec­tive eco­nomic changes.

Us­ing real GDP for this cal­cu­la­tion, Ukraine’s econ­omy was only 11.5% smaller in 2017 from pre-war 2013. This in­di­ca­tor alone tes­ti­fies that the sup­posed eco­nomic abyss into which the coun­try fell in the af­ter­math of Rus­sia’s in­va­sions and war was ac­tu­ally not that deep. By com­par­i­son, dur­ing the world eco­nomic cri­sis of 2009, the do­mes­tic econ­omy shrank 14.8% and by 2013, four years of re­cov­ery later, real GDP was still 6.4% be­low 2008.

In­deed, the sit­u­a­tion is even bet­ter when ex­am­ined across dif­fer­ent re­gions. Now we see that by 2016, 10 oblasts and Kyiv were only 1-5% be­low 2013 lev­els, while an­other five were at about the same level or sig­nif­i­cant-

IT IS TIME TO STOP SEARCH­ING FOR SOME­THING ELSE TO RE­DIS­TRIBUTE AND TO AIM FOR GROW­ING THE NATIONAL WEALTH AND ES­TAB­LISH­ING SUCH PRIN­CI­PLES FOR SHAR­ING IT THAT WILL FORCE EV­ERY­ONE TO PAR­TIC­I­PATE IN MUL­TI­PLY­ING IT

ly higher—Vin­nyt­sia, Zhy­to­myr and Volyn. More­over, growth con­tin­ued through 2017, although ex­act num­bers are not yet avail­able. The over­all “loss” for this pe­riod, 13.7% of GDP com­pared to 2013, is a re­flec­tion of the largely ar­ti­fi­cial de­cline in in­di­ca­tors for Donetsk and Luhansk Oblasts: -59.2% and -65.7% (see Sta­tis­ti­cal dis­tor­tions). This was be­cause Derzh­stat, the sta­tis­tics of­fice, con­tin­ued to in­clude in its base­line all of Donetsk and Luhansk Oblasts, which were not un­der govern­ment con­trol in 2016, 2017 or 2018—de­spite its of­fi­cial claims that they were not in­clud­ing tem­po­rar­ily oc­cu­pied Crimea, Sev­astopol and ORDiLO. The pic­ture of an enor­mous eco­nomic col­lapse painted as a re­sult of this, which in re­al­ity took place in the ter­ri­to­ries that were oc­cu­pied, but not in the rest of those two oblasts, was the main cause of the 13.7% “ad­just­ment” in 2016 com­pared to 2013.

COM­PAR­ING TIMES AND NEIGH­BORS

Since the coun­try is not in a cat­a­strophic state of col­lapse com­pared to pre­war in­di­ca­tors, it means that the corol­lary myth to that is that it will take decades for the coun­try to get back to those lev­els. Across the free ter­ri­tory of Ukraine, real GDP could be back up at 2013 lev­els and even a lit­tle higher by 2019 if the coun­try can main­tain the cur­rent mod­est pace of growth of 2.5-3.0%. In­deed, there’s a good chance that Ukraine could be back at 2013 lev­els even in euro terms by next year, if not en­tirely in dol­lar terms, pro­vided that the nec­es­sary ad­just­ment is made for the tem­po­rar­ily oc­cu­pied ter­ri­to­ries. Nei­ther the sup­posed sidelin­ing of “pro­fes­sion­als” from power nor the largely myth­i­cal “dis­rup­tion of tra­di­tional eco­nomic ties” with Rus­sia stood, stand nor will stand in the way of this.

Eco­nomic stag­na­tion be­gan long be­fore the Rev­o­lu­tion of Dig­nity and Rus­sian ag­gres­sion. It hap­pened un­der the pre­vi­ous Ad­min­is­tra­tion. By 2012, GDP growth was a mar­ginal 0.3% and in 2013 it was com­pletely flat. In fact, the eco­nomic de­cline of 2014-2015 was the re­sult of the nega­tive ac­tions of the Yanukovych regime, which for sev­eral years had been wind­ing it up like a spring. What’s more, lately the do­mes­tic econ­omy has been post­ing higher growth than its post-soviet Eurasian neigh­bors—even with­out any pol­icy of stim­u­la­tion.

For in­stance, Rus­sia’s pace of growth has been well be­low that of Ukraine for the third year run­ning: in 2016, it con­tracted to only. 0.2% growth, when Ukraine was post­ing 2.4% growth; in 2017, Rus­sia rose to only 1.5% while Ukraine inched up to 2.5%; in Q1’18, Rus­sia’s econ­omy only grew 1.1% while Ukraine zipped ahead at 3.1%. Be­larus, mean­while, de­spite en­joy­ing no “dis­rup­tion of tra­di­tional eco­nomic ties,” plus cheap gas and oil from the RF, be­gan to re­cover only in 2017, not in 2016 like Ukraine, and con­tin­ues to do more poorly for the third year run­ning. For in­stance, where Ukraine’s GDP grew 2.4% in 2016, Be­larus’s con­tracted by 2.5%, while in 2017, it grew 2.4% vs. Ukraine’s 2.5%.

NOW FOR THE DE­TAILS

When sec­toral anal­y­sis is ap­plied to GDP, it be­comes ap­par­ent that the least re­formed sec­tors of the econ­omy are also the ones that are per­form­ing the most poorly. For in­stance, over­all GDP grew nearly 5% over 2016–2017, with the main driv­ers be­ing con­struc­tion at +46.1% and closely re­lated real es­tate at 10.2%, and the IT sphere, which grew 14.7%. Other sec­tors that have been grow­ing faster than the econ­omy as a whole in­clude re­tail trade at 9.5%, pro­cess­ing in­dus­tries at 9.0%, the ho­tel and res­tau­rant busi­ness at 8.0%, and postal and ship­ping ser­vices at 7.5%. Mean­while, de­lays in re­forms have led to de­clines in sec­tors like health­care at -3.6%, ed­u­ca­tion at -4.7%, en­ergy at -5.1%, and waste man­age­ment, wa­ter sup­ply and sewage at -21.8%.

But the prob­lems and the task of re­solv­ing them are not to re­turn to 2013 lev­els or even those of 2008 or even 1991. It’s not to re­place to­day’s pace by yes­ter­day’s or to re­turn to partly lost tra­di­tional mar­kets for out­dated Ukrainian prod­ucts. What’s vi­tally im­por­tant is to stop the down­ward spi­ral, where every eco­nomic boom and bust cy­cle ends up with the coun­try’s econ­omy in worse and worse shape. Ukraine is cur­rently at an ex­tremely low level for it to con­sider lit­tle more than re­cov­er­ing to 2008 or 2013 lev­els, or even a mod­est im­prove­ment over them.

For the coun­try to rise from the bot­tom, it needs a car­di­nal shift in its pol­icy pri­or­i­ties. It needs to stop feed­ing off the na­tion’s ever-shrink­ing nat­u­ral wealth and to stop eter­nally search­ing for some­thing else to re­dis­tribute. Ukraine needs to aim, in­stead, for grow­ing the national wealth and es­tab­lish­ing such prin­ci­ples for shar­ing it that will force ev­ery­one to par­tic­i­pate as ac­tively as pos­si­ble in mul­ti­ply­ing it.

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