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Eco­nomic growth in most oblasts has reached pre-war lev­els or even passed them. What prospects does Ukraine face now?

The Ukrainian Week - - CONTENTS - Olek­sandr Kra­mar

Eco­nomic growth in most oblasts has reached pre-war lev­els or even passed them. What prospects does Ukraine face now?

As elec­tion fever goes into full swing and politi­cians stoke the fears of or­di­nary Ukraini­ans by talk­ing about the sup­pos­edly “cat­a­strophic” state of Ukraine’s econ­omy, the re­al­ity is that most oblasts have al­ready re­turned to pre-war lev­els of eco­nomic growth and some have even passed 2013-early 2014 in­di­ca­tors. What’s more eco­nomic growth is pick­ing up pace across the board. In 2017, GDP grew by 2.6% in Ukraine, while in QI’18 it was up to 3.1%, and up again to 3.6% in QII. Still, the sit­u­a­tion on world mar­kets is poised to hit Ukraine’s weak spots hard in the not-too-dis­tant fu­ture, so the pace the coun­try needs to reach for long-term, sus­tain­able growth re­quires a car­di­nal change to its eco­nomic poli­cies.

AN EX­PAND­ING GROWTH ZONE

Ac­cord­ing to Derzh­stat, the statis­tics agency, 2017 GDP was about 11.6% be­low 2013 lev­els. Once oc­cu­pied Donetsk and Luhansk Oblasts are taken out of the cal­cu­la­tion, how­ever, GDP was only about 2% be­low 2013 lev­els, which re­flects the pace of pop­u­la­tion drop-off in the rest of Ukraine over the last four years. Once growth is bro­ken down by oblast, this im­prove­ment be­comes even more dis­tinct.

Com­pared to pre-war 2013, the growth lead­ers con­tinue to be two neigh­bors in Right Bank Ukraine, Vin­nyt­sia and Zhy­to­myr Oblasts, which recorded per capita GRP in 2017 that was 10.5% and 11.8% higher than in 2013. In­deed, Zhy­to­myr out­stripped Vin­nyt­sia last year. Mean­while, Kh­mel­nytsk Oblast has been quickly catch­ing up to them, with GRP 6.5% up from 2013 and 9.0% up from 2016; Odesa Oblast posted 7.1% over 2013 and 6.6% over 2016; and Volyn Oblast posed 8.6% over 2013 and 3.3% over 2016. Even Ternopil Oblast posted 3.7% over 2013 last year and was 3.6% up from 2016.

In this way, three oblasts that posted sig­nif­i­cantly higher growth in 2016-2017 than they had in 2013 were joined by three that now ef­fec­tively es­tab­lish a solid band from Odesa’s Black Sea shore­line to the Volyn bor­der with Poland — if it weren’t for Rivne Oblast. To the east of this strip, two nascent “horns” are formed by two oblasts each that ex­tend the pos­i­tive trend, al­beit not so sub­stan­tially, as they, too, passed 2013 per capita GRP growth in 2017. Go­ing to the north­east are Sumy Oblast with 1.2% and Ch­erni­hiv with +0.7%, while go­ing to the south are Kher­son with +1.4% and Za­por­izhzhia with +0.5%.

These horns of im­prove­ment to the east are sep­a­rated from the six boomers by four oblasts that are still mov­ing to­wards re­cov­ery: Kyiv, Cherkasy, Kirovohrad and Myko­layiv. Their per capita GRP was only 1.2-1.8% short of 2013 re­sults. Given that av­er­age an­nual growth to­day is 3.4% since the be­gin­ning of 2018, these oblasts will prob­a­bly also reach re­cov­ery lev­els and join the Right Bank body to its four-Left Bank oblast “horns.”

At this point, we’re look­ing at 14 out of 25 re­gions of free Ukraine in which eco­nomic growth has reached or sub­stan­tially sur­passed pre-war in­di­ca­tors. These 14 neigh­bor on three more re­gions — the city of Kyiv, and Lviv and Ivano-Frankivsk Oblasts — where the lat­est fig­ures show that their GRP was around 3% lower in 2017 than prior to Rus­sia’s in­va­sion. If eco­nomic growth keeps pace at 3.5-3.6% this year, these three re­gions could also re­cover to 2013 lev­els, es­pe­cially since Kyiv, at 7.4%, and Ivano-Frankivsk Oblast, at 6.3%, were among the growth lead­ers in 2017.

MIXED NEWS ELSE­WHERE

The three re­main­ing west­ern oblasts — Ch­er­nivtsi, Zakarpat­tia and Rivne — are, for now in far worse shape than five years ago. The level of de­cline there is com­pa­ra­ble to the three oblasts clos­est to the war zone in Don­bas: Kharkiv, Poltava and Dnipropetro­vsk. So far, none of these six ap­pear close to re­cov­er­ing.

More­over, a higher pace among the oblasts in the growth belt cen­tered on Right Bank Ukraine has not led to grow­ing wealth or a higher eco­nomic level al­ready to­day. Mostly these oblasts are clos­ing the gap with the pre­vi­ously suc­cess­ful oblasts. In­deed, vary­ing de­grees of growth and dy­nam­ics don’t al­ways con­vert di­rectly into higher in­comes for res­i­dents of these re­gions. A com­par­i­son of av­er­age salaries in euro terms for May 2014 and May 2018 shows that na­tion­ally they are 44% higher (see Change in Av­er­age Salaries). Even tak­ing in­fla­tion into ac­count, most re­gions have al­ready seen this in­di­ca­tor re­stored to early 2014 lev­els.

Taken in­di­vid­u­ally, how­ever, the sit­u­a­tion varies wildly and there are plenty of para­doxes. For in­stance, in Ternopil and Vin­nyt­sia Oblasts, which are in the top five for eco­nomic growth since 2013 at 3.7% and 10.5%, av­er­age wages were 5657% higher in May 2018 than they were in May 2014. Mean­while, in Zakarpat­tia, whose econ­omy con­tin­ued to con­tract, by 8.3% this past year, av­er­age wages have not only grown the most sub­stan­tially in Ukraine, at 69%, but are also con­sid­er­ably higher than in re­gions with the best eco­nomic re­sults in re­cent years. On the other hand, Odesa was one of the lead­ers

In 14 out of 25 re­gions of free Ukraine eco­nomic growth has reached or sub­stan­tially sur­passed pre-war in­di­ca­tors, and three re­gions — the city of Kyiv, and Lviv and Ivano-Frankivsk Oblasts — could also re­cover to 2013 lev­els

in per capita GRP growth at 7.1%, yet av­er­age salaries in May 2018 were barely higher than the na­tional av­er­age at +48% and were lower than the av­er­age wage in Zakarpat­tia.

In­dus­trial out­put has also showed mixed re­sults com­pared to over­all eco­nomic re­sults. In­deed, a re­turn to pre-war lev­els can be seen at the same time as the gen­eral state of the re­gional econ­omy is con­sid­er­ably be­hind 2013 lev­els. In some oblasts, how­ever, to­tal GRP has re­cov­ered while the in­dus­trial sec­tor con­tin­ues to lag. At the same time, there are some gen­eral trends in in­dus­try, with the growth belt do­ing the best. Some shifts have hap­pened since 2013, as well. For in­stance, Kyiv Oblast has seen 22.1% growth in in­dus­trial out­put com­pared to early 2014, and is sec­ond only to Zhy­to­myr with 25.0% growth. Vin­nyt­sia, by con­trast, has fallen to fourth place and both Vin­nyt­sia and Zhy­to­myr have seen in­dus­trial growth sag this past year. Mean­while, west­ern oblasts — Ivano-Frankivsk, Lviv, Ch­er­nivtsi, Volyn, and Zakarpat­tia — have seen in­dus­trial out­put pick up and all but Zakarpat­tia have al­ready passed the lev­els they saw in spring 2014. Odesa and Kirovohrad Oblasts have also sur­passed 2014 lev­els, while Za­por­izhzhia, Kher­son and Kh­mel­nytsk have re­cov­ered.

Al­to­gether, in­dus­trial out­put is now at least the same as early 2014 or sig­nif­i­cantly higher in 13 of free Ukraine’s 25 re­gions. Five more oblasts are within 2.4-5.7% of re­cov­ery. Since of­fi­cial statis­tics in­clude in­dus­tries lo­cated in ORDiLO, thereby dis­tort­ing the pic­ture in Donetsk and Luhansk Oblasts, when these two are left out of in­dus­trial com­par­isons, Ukraine ends up with just five re­gions — the city of Kyiv, Zakarpat­tia, Ch­erni­hiv, Kharkiv, and Dnipropetro­vsk — were in­dus­trial out­put re­mains 9-13% be­low 2013 lev­els.

What’s more, any de­cline should not be linked to the war in the east for most oblasts: the worst in­dus­trial re­sults are in Zakarpat­tia and Ch­erni­hiv, and not in the front­line oblasts of Kharkiv and Dnipropetro­vsk. And both Zakarpat­tia and Ch­erni­hiv are start­ing to see rel­a­tively dy­namic growth. In short, some oblasts saw in­dus­try pick up pace while oth­ers have watched it de­cline, but this has of­ten been be­cause of the high pro­por­tion of en­ter­prises in key sec­tors that have not adapted well to the sit­u­a­tion on global mar­kets.

If we look at changes in in­dus­trial out­put across the coun­try with­out in­clud­ing the sta­tis­ti­cally dis­torted data for Donetsk and Luhansk Oblasts, it turns out that it’s not much lower than it was in early 2014. For in­stance, for Jan­uary-May 2014, the share of Donetsk Oblast in all do­mes­tic in­dus­trial out­put was 17.5%, while that of Luhansk was 6.3%, so the loss of 85.2% of Luhansk Oblast’s out­put com­pares to the 5.4% loss na­tion­wide, and 51.6% lost in Donetsk com­pares to 9.0% na­tion­wide. Of the 16.5% de­cline in in­dus­trial out­put over Jan­uary-May 2018 com­pared to the same pe­riod in 2014, 14.4% was due to these two oblasts, leav­ing the real de­cline in the last three years only 2.1%.

OUT­SIDE IN­FLU­ENCES

The re­vival of Ukraine’s econ­omy, es­pe­cially in the growth belt is very closely tied to un­usu­ally dy­namic growth in neigh­bor­ing EU coun­tries over the last few years, where the pace of growth has been far higher than in Ukraine as a whole or even in the in­di­vid­u­ally most suc­cess­ful re­gions over this same pe­riod. The most pos­i­tive growth was seen in Ro­ma­nia, where 2017 GDP was 20.1% higher than in 2013

and the coun­try posted a fur­ther 4.3% growth for the first half of 2018 com­pared to 2017. Poland’s econ­omy grew 15.5% in the last four years and 5.0% in HI’18; Slo­vakia grew 14.1% and 3.8%, while Hun­gary grew 14.5% over this pe­riod and added 4.5% in HI’18 com­pared to 2017.

Un­usu­ally dy­namic growth in eastern EU mem­bers in re­cent years has been one of the key fac­tors that stim­u­lated strong growth in Ukraine’s more suc­cess­ful re­gions as they have been in­creas­ing their trade with the EU, es­pe­cially with coun­tries in the bor­der re­gion. For in­stance, to­tal ex­ports of goods from Ukraine to just four EU mem­bers — Poland Slo­vakia, Hun­gary and Ro­ma­nia — grew from €4.08bn in 2013 to €4.91bn in 2017. Ex­ports to Poland alone jumped 25.4% from €1.92bn to €2.41bn, while to the most dy­namic in the group, Ro­ma­nia, they grew 76.3%, from €0.42bn to €0.74bn. So far, this trend is hold­ing.

When ex­port vol­umes are com­pared for QI of 2014 and 2018 while leav­ing out Crimea, Luhansk and Donetsk, they grew 5.1% or from €7.92bn to €8.33bn. Most of Ukraine’s re­gions have adapted well to the new re­al­i­ties, and the most ac­tive ex­port­ing ac­tiv­ity can be seen in Right Bank Ukraine. In fact, some oblasts have in­creased ex­ports of goods 50-150% (see The Land of Re­newal). For in­stance, ex­ports from Vin­nyt­sia and Ivano-Frankivsk Oblasts went up 140%, Ch­er­nivtsi’s in­creased 120%, Ternopil saw 70% growth, while Kh­mel­nytsk, Lviv, Zakarpat­tia and Volyn saw a 43-46% in­crease.

But fur­ther east and south in Ukraine the in­ten­sity of ex­ports on a re­gional ba­sis com­pared to 2013 has grad­u­ally gone down and now vol­umes are be­gin­ning to shrink. Most south­east­ern oblasts have seen a con­sid­er­able de­cline in ex­port vol­umes com­pared to early 2014. In Kharkiv it is -34%. In con­trast to the dy­namic four years ago, to­day Vin­nyt­sia’s €272.0mn in ex­ports beats Kharkiv’s €223.8mn, just as Lviv’s €363.2mn beats Odesa’s €339.0mn. The big­gest de­clines in Donetsk and Luhansk, at -49.2% and -92.8%, are pri­mar­ily due to the loss of in­dus­trial en­ter­prises to Rus­sian oc­cu­pa­tion. In those parts of the two oblasts that are not un­der oc­cu­pa­tion, ex­ports have ac­tu­ally been grow­ing, es­pe­cially in the steel in­dus­try in Donetsk Oblast.

Mean­while, Ukraine’s eastern and north­ern neigh­bors have ex­pe­ri­enced a far more neg­a­tive eco­nomic sit­u­a­tion than

the coun­try’s west­ern ones. Rus­sia’s real GDP growth in 2016 was ac­tu­ally 0.6% be­low 2013 re­sults and since the be­gin­ning of 2018, its econ­omy has been grow­ing half as fast as Ukraine’s. Ac­cord­ing to Ros­stat, Rus­sia’s econ­omy grew only 1.6% in HI’18, com­pared to Ukraine’s 3.4% and the 4-5% growth posted by its EU neigh­bors.

Of course, those oblasts that have less suc­cess­fully re­ori­ented them­selves on al­ter­nate mar­kets have suf­fered the most. Ex­ports to Rus­sia have col­lapsed from €11.1bn in 2013 to €3.48bn — and not only or as much as a con­se­quence of mu­tual sanc­tions and the war. The thing is that as Rus­sia’s econ­omy has con­tracted, im­ports from other coun­tries have also gone down, es­pe­cially for­mer soviet ones. Ac­cord­ing to Ros­stat, to­tal im­ports into Rus­sia col­lapsed from $315bn in 2013 to US $182bn in 2016, but they man­aged to re­cover some­what in 2017, to US $227bn. In Be­larus, which is very de­pen­dent on ex­port mar­kets in its big­gest neigh­bor, the de­cline of Rus­sia’s econ­omy has meant that Rus­sian ex­ports fell from US $16.8bn in 2013 to US $10.9bn in 2016, while vol­umes in 2017 were 2.3% be­low 2013 lev­els.

AN UN­CER­TAIN FU­TURE

For a coun­try as poor as Ukraine, un­for­tu­nately, the cur­rent pace of re­cov­ery and growth is far from enough. More­over, sim­ple re­cov­ery to 2013 lev­els or even to the much higher lev­els in pre-cri­sis 2008. If Ukraine wants to leave the third world be­hind and join the first as a de­vel­oped Euro­pean coun­try, it needs to get out of its down­ward spi­ral, where ev­ery new eco­nomic cy­cle of growth and de­cline ends with its econ­omy in even worse con­di­tion.

What’s more, the ex­ter­nal fac­tors that have been so fa­vor­able for ex­ports, for in­stance, could eas­ily be­come ex­tremely neg­a­tive for Ukraine’s econ­omy in its cur­rent form. Ukraine also risks dis­cov­er­ing that to­day’s “dif­fi­cult eco­nomic sit­u­a­tion” was ac­tu­ally the verge of eco­nomic re­cov­ery. The world econ­omy, es­pe­cially its raw ma­te­ri­als sec­tor, ap­pears to be more and more un­der threat of the next cy­cle of a plan­e­tary cri­sis. To­day, such a cri­sis could be pro­voked by a grow­ing con­fronta­tion among key eco­nomic cen­ters around the world. With a grow­ing eco­nomic cri­sis, the strong­est economies could re­sort to more and more trade bar­ri­ers, which will hit the raw ma­te­rial and es­pe­cially the semi-fin­ished prod­uct seg­ments of Ukraine’s econ­omy the hard­est.

And so, re­cov­ery is hap­pen­ing, but Ukraine will only be able to push off from the bot­tom and hit a high pace of growth in the face of ever more ag­gres­sive con­flicts for a “place un­der the sun” if gov­ern­ment pol­icy rad­i­cally changes its pri­or­i­ties. It’s high time that the phi­los­o­phy of re­dis­tri­bu­tion and feed­ing on the shrink­ing wealth of the coun­try is aban­doned and re­placed by a fo­cus on grow­ing na­tional wealth and es­tab­lish­ing prin­ci­ples of dis­tri­bu­tion that will force ev­ery­one to en­gage as much as pos­si­ble in mul­ti­ply­ing this wealth.

THE EX­TER­NAL FAC­TORS COULD EAS­ILY BE­COME EX­TREMELY NEG­A­TIVE FOR UKRAINE'S ECON­OMY IN ITS CUR­RENT FORM. UKRAINE ALSO RISKS DIS­COV­ER­ING THAT TO­DAY'S “DIF­FI­CULT ECO­NOMIC SIT­U­A­TION” WAS AC­TU­ALLY THE VERGE OF ECO­NOMIC RE­COV­ERY

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