Problems and Basic Foundations of Effective Economic Recovery Planning

Vyacheslav Butko, Economist, Economic Advisor of the Kyiv Security Forum

The main problem in developing plans for Ukraine’s economic recovery and calculating the costs is considered to be the high uncertainty caused by the lack of understanding regarding the outcomes and timeframes of ending the war. This is true. However, this is far from the only issue that arises when forming recovery plans and assessing the expenses required for their implementation.

High-Level Problems

Extremely important problems arise from the lack of forecasting, when drafting recovery plans, regarding the following:

• the state of the global economy, of which Ukraine’s economy is only a tiny part (in the last pre-war year — an economically successful one for Ukraine — our country’s GDP accounted for 0.18% of global GDP), meaning the dependence of Ukraine’s economy on the global one is critically large;
• external and internal demand for the products that are currently produced in Ukraine and those planned for future production;
• the situation in the global markets essential for Ukraine — both export and import markets.

In other words, major shortcomings of current recovery plans and cost assessments are that they do not account for changes in the world economy. Because of that, they propose rebuilding Ukraine’s economy without integrating it into the current and future global economic paradigm — and given the “weight” of Ukraine’s economy and its full dependence on the global system, this is unacceptable.

Moreover, existing plans are based on:

• the pre-war structure of the economy, which cannot be restored and, more importantly, should not be restored, as it is morally and materially outdated, and did not meet the technological challenges even of the mid-2000s;
• the pre-war size and structure of the population. And even though they try to account for the impact of labor on economic development (though they exaggerate its negative effect, ignoring modern trends in technology and production organization), they do not account for the impact of demographic factors on several extremely important aspects — demand for goods (both structure and volume), budget revenues and expenditures, economic efficiency and productivity, inflation, investment, and the size and structure of assets in the economy.

A separate major issue is that recovery plans avoid addressing the question of markets for the products that will be produced in Ukraine.

The Issue of Investment

In one of the reports by experts from the European Bank for Reconstruction and Development (EBRD), a plan is presented for Ukraine’s economic recovery to its pre-war level within five years.

It follows that for Ukraine to recover within five years, its economy must grow by 14.2% annually (over these five years). This would raise GDP to 225 billion USD from 150 billion USD in 2022.

The key guarantee of stable and rapid economic growth is a high investment-to-GDP ratio. According to EBRD calculations, for Ukraine to reach its pre-war GDP level in five years, annual investments of 50 billion USD are needed (250 billion USD over five years).

50 billion USD is 27% of Ukraine’s 2024 GDP.

The probability of attracting investments on this scale appears extremely low. For comparison:

• the total foreign direct investment in Ukraine from 2010 to 2021 was 39.1 billion USD — an average of 3.26 billion USD per year;
• before the war, annual investment inflows averaged only 3.8% of GDP in 2010-2021.

Factors of Economic Growth

Using data from Penn World Data, one can see that the negative investment impulse emerged even before the war. From 1997 to 2021, Ukraine’s GDP grew on average by 2.6%, while the capital stock depreciated by 0.4%. Labor resources declined by 2.1% annually.

The main driver of Ukraine’s growth was production and management technologies, which added 5.1% annually.

Most experts believe that to compensate for population decline, capital stock must be sharply increased. That requires investment — which is almost absent.

Therefore, there is no other option but to sharply increase labor productivity — which is the lowest in Europe.

Conclusions and Recommendations

Planning and forecasting recovery, as well as estimating its costs within the current dominant paradigm, are of limited use.

Without downplaying the problems of investment and labor resources, it must be acknowledged: issues of factor productivity — technology, institutions, production organization, efficiency of resource use — are and will remain the main reasons limiting Ukraine’s economic development.

This is where the discourse on Ukraine’s economic recovery should be focused.