Out of the public eye, a debate rages over Ukraine's post-war economy

Out of the public eye, a debate rages over Ukraine’s post-war economy

With Russian missiles pounding apartment buildings, power plants, schools and roads, a scintillating vision of a rebuilt post-war Ukraine seems impossibly distant. But an urgent battle of ideas has already begun over how to handle what would be the largest reconstruction project in Europe since the end of the Second World War.

The sparring engaged heads of state and heads of humanitarian groups, universities and banks from around the world – representing governments, organizations and businesses willing to donate or loan the hundreds of billions of dollars that could be necessary, as well as those who hold to profit from it.

Much of the attention paid to rescuing damaged Ukrainian cities and infrastructure has focused on its cost. The fight over the setting that should largely drive this restructuring has been happening below the surface, gaining far less public attention.

Any transition for Ukraine from a wartime to a peacetime economy promises to be difficult, pitting ideas for a strong central government that would target spending with a tighter hand against lighter regulation in which free markets dominate. There are other tricky, though perhaps less important, transitions that should be run through simultaneously.

Three decades have passed since Ukraine gained independence, but the Soviet legacy lives on. It can be seen in the supply lines and transportation networks that were created when Kyiv and Moscow were part of one nation. Ukraine was designed and equipped with Soviet-era design, machinery and infrastructure that in many ways remains disconnected from Europe. For example, the gauges of the Ukrainian railways are a different size from those of Europe, which means that trains cannot easily cross borders.

The lack of integration exists sector after sector. Parts for everything from nuclear reactors to refrigerators previously supplied by Russia will have to come from elsewhere.

More difficult is the legacy of Ukraine’s flawed and incomplete transition to a modern, democratic market economy after the breakup of the Soviet Union. Parts of his business world have been plagued by corruption and cronyism. And Ukraine has yet to create the kind of resilient political institutions that underpin the standards of governance set by the European Union, which will likely be its biggest trading partner if the war is won.

This lack of an accountable, transparent and trustworthy public sector is at the heart of much of the debate about what Ukraine should look like and who can make those decisions.

“There’s this idealistic view that government can direct resources and people will listen,” said Yuriy Gorodnichenko, an economist at the University of California, Berkeley. “As someone who grew up in Ukraine,” he added, “that’s not how it works.”

“The government does not have the ability to regulate,” he said. “It does not have a professional and well-trained bureaucracy.”

Mr. Gorodnichenko has contributed reports on Ukraine’s reconstruction for London’s Center for Economic Policy Research, an independent network of economists. The group’s recommendations are broad, but among them are a call for a “radical deregulation of economic activity” that involves more reliance on the market to distribute resources and guide the economy, a relaxation of labor laws and a policy shift and economic control from central government to localities.

Such calls have set off alarms.

“I just find it mind-boggling,” said Joseph Stiglitz, a Columbia University economist and Nobel laureate. He fears that the kind of hands-off neoliberal approach that he says has led to inequality, environmental degradation, and inadequate housing and medical care in the United States and other countries will be presented as a model for Ukraine.

Ukraine is clearly in crisis mode, struggling to feed, house and warm people through the winter while fighting a war. Survival is the priority. Post-war reconstruction is expected to take at least a decade. Still, Mr Stiglitz said decisions made today could shape what happened during this time.

Recent labor law changes approved by the Ukrainian parliament have become the focal point of the differences. Mr. Stiglitz and other critics warn that worker protections are being dismantled, noting that employers have more leeway to set hours, change working conditions and fire workers while weakening the bargaining power of unions.

Ukraine is undermining labor protections as the European Union strengthens legal obligations to promote collective bargaining, said Luke Cooper, an economist at the London School of Economics. Military and economic success depends on citizen buy-in, and that effort will be hampered if workers feel their protections are being weakened and their wages are falling.

For supporters, however, the changes were a much-needed overhaul of sclerotic and outdated Soviet-era rules. Old labor regulations, Mr Gorodnichenko said, required employers to keep employees on the payroll even if the whole factory had been destroyed or the workers had left the country months earlier.

“What we said in the report is not at all controversial in Ukraine,” he said. “The situation is so serious, something has to change.”

Tymofiy Mylovanov, a professor at the Kyiv School of Economics and a former government minister who also contributed to the center’s policy papers, said the push for deregulation was not caused by blind faith in a market economy, but rather by concerns that public institutions were not developed. enough to handle the task.

He said he agreed with Mr. Stiglitz’s general criticism, but that many of the on-the-ground issues facing Ukraine were far removed from theoretical discussions of government control and market deregulation. Ukraine is an “economy in transition” and a “teenage democracy”, he said. Severance pay or two months’ notice is irrelevant when businesses have been destroyed and need to be rebuilt, Mr Mylovanov said.

Incompetence and corruption are rampant in both the private and public sectors, Mr Mylovanov acknowledged, and a balance must be found to eradicate it. Ukraine’s National Anti-Corruption Bureau recently accused a property developer and former lawmaker of offering the mayor of Dnipro a 22 million euro bribe to secure the contract to build the city’s metro system. town.

“The resilience of the Ukrainian economy will come from cooperation,” Mr. Mylovanov said, “of market institutions and state institutions working together.”

The scale of the task is staggering. Ukraine recently repelled Russian forces, but the pace and destruction of Russian attacks on civilians and infrastructure has accelerated, with Moscow targeting power plants, fuel depots and aqueducts. Some towns were almost wiped out and the path of devastation is wide and deep across the country, affecting factories, homes, offices, telephone lines, hospitals, churches, warehouses, ports, railroads, iron and agricultural land. The country’s gross domestic product is expected to plunge 45% this year, according to the World Bank.

Nearly eight million people have sought temporary refuge outside the country, while seven million inside have been displaced. Education, social and health services will need to be restored as well as the physical infrastructure.

Total cost estimates have varied widely and are still being updated. Over the summer, the Ukrainian Prime Minister estimated the cost of reconstruction at $750 billion. Every day that the war continues, this number increases. Even though much of this cost is borne by other nations and global organizations, Ukraine is expected to rack up heavy debts and will need a healthy economy when the fighting ends for a lasting recovery.

“You don’t get there with much greater private sector involvement,” said Matteo Patrone, managing director for Eastern Europe and the Caucasus at the European Bank for Reconstruction and Development in Kyiv.

The development bank, which has provided Ukraine with hundreds of millions of dollars in emergency loans, guarantees and donor grants, has a mandate to “promote the transition to open market economies in order to promote the ‘private and entrepreneurial initiative’.

Even so, Mr. Matteo remains optimistic. There is a broad consensus on the general objectives: Ukraine must be transformed into a modern democratic state and a market economy with a strong judicial system and strict safeguards.

The industrial base has been destroyed, but Ukraine is turned towards Europe and attracts Western investment. It has an educated population and a competitive advantage in agribusiness. And, Mr. Matteo added, “Ukraine has a strong and vibrant civil society.”

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