"The Marshall Plan for Ukraine after the war is our way to qualitative changes

"The Marshall Plan for Ukraine after the war is our way to qualitative changes

Ukraine has a good chance not so much to restore the destroyed and obsolete, as to make qualitative changes, the transition from an agrarian-raw material economy to the production of goods with ...

Now 80% of Ukrainians believe that Ukraine will win the war with Russia, although it is still difficult to imagine how to win this victory.

But after all, a small free ancient Greece defeated a much larger and stronger tyrannical Persia, which looks like a miracle even after two thousand years. Let's hope for the same miracle now, free people can defeat tyranny, even very strong one.

A not very old example is the confrontation of little Finland in the winter of 1939-40 when the USSR attacked: although Finland lost about 8% of its territory, it survived and prospered.

After the victory, we will be in completely different economic circumstances than before the war, so a different economic policy will be required.

The main differences will be as follows:

- we will get a huge destruction of infrastructure, industry, housing and communal services, in the amount of billions of dollars;

- we will have access to practically unlimited international financial resources, an analogue of the "Marshall Plan" will certainly be introduced, it will be financed not only by the United States, but by the entire civilized world;

- international technical assistance will provide access to modern Western technologies.

These circumstances provide a chance to create a new structure of the economy, to move from a raw-material-agrarian type of economy to a technological one, in which Ukraine will be able to sell to the world not only grain and ore, but also a variety of products with high added value.

Such a structural change will significantly increase the national income (one can hope for a growth of 4-5 times in 20 years) and the standard of living in the country. There is a chance that Ukraine will bypass Russia in terms of living standards for the first time in the years of independence.

There is no doubt that after the defeat of Russia, Western countries will not be able to refuse Ukraine the transfer of the most modern technologies, including in the military sphere. Therefore, the number one task is not to miss this chance, the window of opportunity will be open for who knows how long.

To do this, politicians need to overcome the desire to focus on simple and visible problems - on the restoration of roads, bridges, hospitals, housing, and so on.

This is absolutely necessary, but at the same time it is necessary to engage in a radical restructuring of the economy. To do this, you need to decide what to do, and who can do it.

Energy Sector Transformation

The biggest weakness of the Ukrainian economy in terms of national security is energy dependence on a mortal enemy.

Even before the war, a very correct, although very belated decision was made on the agreement with Westinghouse in the field of nuclear energy.

Ukraine needs at least two new nuclear power units with non-Russian fuel and the rejection of Russian fuel at all old nuclear power plants. There is no doubt that the deal will be executed, dependence on Russia will be eliminated.

Getting rid of Russian dependence requires not only traditional measures, such as increasing domestic oil, gas, and coal production, but also new technological solutions, primarily a transition to renewable energy sources.

As a result of misguided policies, the development of the renewable energy sector has slowed dramatically in 2020.

It is no longer possible to simply return the “green tariff”, as it existed before 2020, due to technical problems of a lack of shunting capacities and means of regulating frequency and load in the Ukrainian energy system.

An extensive increase in the capacity of solar and wind farms will only exacerbate the imbalance in the energy system. Modern technologies offer two ways to solve the problem: for short-term energy storage - these are battery storage devices (BESS), for long-term storage - this is hydrogen.

Hydrogen is also the most promising alternative to gasoline and diesel as a vehicle fuel.

The needs of the Ukrainian energy system for battery storage are so great that it makes sense to establish their local production.

Moreover, it is not difficult to set up such production not only for domestic needs, but also for export to the EU. The necessary technology and marketing services can be obtained from the US and South Korea.

Hydrogen, produced by electrolysis with electricity from renewable sources (so-called "green hydrogen"), is now the most popular technology, but it is not a new technology at all, it has been known since 1800.

A completely new word in hydrogen technology can be synthetic biology, that is, the creation of artificial microorganisms capable of producing hydrogen from hydrocarbons. At the laboratory level, this is already working, commercialization is not far off.

Hydrogen produced by synthetic biology promises to be at least half the price of "green hydrogen" because this technology uses long-built and abandoned oil wells that are not suitable for oil production.

Do not forget about such a traditional energy source as biomass: crop waste in our agricultural country can produce at least ten billion cubic meters of natural gas per year, in addition, the cost of energy from biomass is lower than from natural gas, not only at the current exorbitant prices for it, but also under normal market conditions.

Over the past decade, private business has made significant progress only in a small segment of the production of thermal energy from waste wood.

In a much larger segment of the production of heat and electricity from agricultural waste, the successes are scanty, because the problems cannot be overcome by means of only private organizational business, and the state has not expressed a desire to regulate this sector.

These technological changes in the energy sector are really another technical revolution. Similar processes are taking place in many sectors of the economy, so post-war reconstruction based on technologies left over from the Soviet era does not make sense.

A new format for attracting investments

Before the war, the main obstacle to changing the technological base was the lack of investment resources and the structure of gross savings inherent in Ukraine, in which the savings of the population are 4-5 times less than the savings of enterprises.

In Ukraine, the level of domestic savings and investment is critically low, about half what is needed for sustainable and rapid growth at the level of 6-7% per year.

It was not possible to compensate for the lack of domestic investment resources by foreign investors for political reasons, because the economic policy in Ukraine has always been hostile to investors (why this was so is a topic for a separate discussion, which we will not touch now).

After the war, it can be expected that the lack of domestic investment can be compensated by foreign ones.

The significant advantage of enterprise savings over household savings led to the conservation of the structure of the economy, because the metallurgical plant naturally reinvests profits in metallurgy, and not in biotechnology.

It is very important after the war to create a financing mechanism that does not conserve the structure of the economy, but changes it. We do not have and never have had such a mechanism, but there have been examples in economic history, so we have something to focus on. In my opinion, the most successful example was Korean chaebols.

At first glance, chaebols are an example of an oligarchic business, but only at first glance. Since 1961, the Korean government has turned oligarchic formations into a mechanism for rapid economic restructuring.

This mechanism worked as follows: the state, represented by the Economic Planning Council (SEP), determined priority areas and projects for five years, state-owned banks received long-term loans abroad under state guarantees, with these loans banks provided loans on preferential terms to chaebols that carried out projects approved by the SEP.

The criterion for the success of the project was the competitiveness of the chaebol in the world market. Those who did not succeed in exporting were doomed to bankruptcy or takeover, the state did not save them. Such a mechanism made it possible to quickly turn the country of rice growers and fishermen into an exporter of advanced technology products.

How can we use this experience? For us, this is the only option, because we simply do not have sufficiently qualified and conscientious managers for a purely state development mechanism.

I don't share the general view that the government is always a bad owner and manager, Singapore's public sector is a compelling case to the contrary.

The problem is the efficiency of the state apparatus: in Singapore it is one of the best in the world, in Ukraine it is extremely inefficient (the ratings for the effectiveness of public administration are easy to find, they are extremely embarrassing for us).

In addition, the rapid restructuring of the economy by purely market methods has no historical precedents, it is pure myth. In addition, after the war, capital from private sources will be less accessible to Ukraine than funding under interstate agreements.

We will have the same situation as South Korea in the 1960s: development investment mainly from public sources, but through private business. It is easy to understand that such a situation could be an extremely favorable environment for the rampant flowering of corruption. This threat must be constantly kept in mind.

First of all, for the proposed option of economic policy, it is necessary to create a state body similar to the SEP, which we do not have and never had. It must determine promising areas and projects, develop and implement long-term development plans.

State-owned banks, such as Ukreximbank or Ukrgasbank, will receive loans abroad, then issue loans to entrepreneurs in pursuance of projects defined by the Ukrainian equivalent of the SEP.

The most difficult question is: to whom to give these funds? It should be issued to those who have proven their ability to carry out significant industrial projects. For example: a person like Pinchuk can be given funds, but people like Kolomoisky or Novinsky - in no case.

I am sure that in Ukraine you can find several dozens of necessary entrepreneurs who can be provided with funds for development projects. No less complicated: who should decide who can be given money?

Those who have demonstrated the ability to make effective organizational decisions in war conditions, that is, people like Beletsky, should decide. War always shows many people with this disposition.

What can Ukraine offer the world?

Right now we cannot say which development projects should be prioritized after the war, but we can indicate the general direction of development. Projects should be aimed at export production, which should occupy the niche in the US and EU markets that is now occupied by imports from China.

This is a kind of import substitution policy, but not imports to Ukraine, but imports to the US and the EU. There is no doubt that now such an economic policy will find support in the EU and the US, because now they all understand what dependence on imports from countries with authoritarian regimes can turn into.

Looking at US imports from China, electrical and electronics products currently account for the largest trade share ($135 billion in 2021, a quarter of all imports from China, about the same volume from China to the EU).

Under the USSR, Ukraine had a huge sector for the production of electric motors, transformers, generators, household electrical equipment and electronics, and similar products. Is there any doubt that with significant investment, Western technology and huge markets in the US and Europe, we can very quickly establish the production of such goods as well as the Chinese?

Another huge segment of US and EU imports from China is sporting goods and toys. For example, in 2021, the United States purchased $40 billion worth of these goods from China. Another huge sector is the import of furniture.

In 2021, the US imported $31 billion worth of furniture from China, and the EU in 2020 - almost 14 billion euros (for comparison: Ukrainian furniture exports in 2020 amounted to $750 million). Are there any technological barriers, or even difficulties, to take a significant part of the American and European market from the Chinese?

The Ukrainian furniture industry, although not very large in terms of production (about 1.5 billion dollars a year), is already quite export-oriented, because it exports more than half of its production, mainly to the EU.

In the production of furniture, the decisive factors are design and cost. Chinese furniture is produced according to Western design, and low cost is achieved not due to low wages (in the Chinese industry it is now higher than in Ukraine), but due to modern high-performance equipment, which makes sense to use only for large-scale production.

Ukrainian furniture production is predominantly small-scale, which does not allow the use of highly efficient equipment. But if the goal is the US and EU markets, then it makes sense to create large-scale production on modern automated equipment.

Taking part of the US and EU market from the Chinese is a very real task, it will improve the structure of our economy and exports, but will not lead to a technological revolution.

We need the latest technologies, and they must be obtained primarily through military-technical cooperation with the United States and Great Britain. Having such a neighbor as Russia, we are forced to have a militarized economy, even if this war brings defeat to Russia, it is inappropriate to expect civilized behavior from Russia in the future.

There is a conventional wisdom that the militarization of the economy hurts economic growth. This is true if we consider the national economy as a closed system, but it is not true if we take into account external economic relations.

If the militarization of the economy is accompanied by significant exports of defense industry products, then the negative impact of militarization on growth does not occur.

For export capacity, the Ukrainian defense industry must gain access to Western technologies, only possible through military-technical cooperation (MTC) with partners such as the US and the UK.

The main obstacle to military-technical cooperation that existed before the war, the fear that the technologies transferred to Ukraine would quickly end up in Russia, would disappear after the war.

In this sector, too, it is impossible to rely on market mechanisms, because modern military and dual-use technologies are the sphere of state regulation, often even state production. Unfortunately, here, too, we can be hindered by the low efficiency of public administration in Ukraine.

It must be said that the creation of an effective state apparatus is a complex task, the ways of solving which are still unclear (for example, the countries of Latin America have not been able to do this for almost 200 years), so there is no need to expect quick success.

To prevent the negative influence of the state on military-technical cooperation projects, perhaps the best way can be the creation of joint ventures, the management of which will be largely provided by the Americans or the British. We still have no experience in creating such joint ventures, so we need quick and decisive action in this direction.

If we summarize what has been stated in brief theses, we can reduce them to several points:

The post-war situation gives a chance not only to restore what was destroyed by the war, but also to qualitatively change the economy, the transition from an agrarian-raw material economy to the production of goods with high added value, to a technological economy.

For state management of the structural restructuring of the economy, a special apparatus is needed, separated from the current problems of restoring the destroyed. Such an apparatus can be made, for example, on the basis of the Ministry for Strategic Industries, or created anew, for example, in the form of the National Commission for Development Strategy. The quality of such a device should be close to the Korean SEP.

Energy is now the most vulnerable sector of the economy in terms of national security. We need a complete rejection of Russian energy sources through the transition to other technological solutions (biomass, hydrogen biotechnologies, new nuclear power plants, battery storage, etc.), i.e. a new energy strategy, new technologies, new industries are needed.

The transition to the production of goods with high added value can be made most quickly by the strategy of export production with the conditional name "European China". An appropriate international program of public-private partnership should be developed and implemented by the National Commission for Development Strategy.

The transition to high-tech industries should begin with the defense industry. Military-technical cooperation agreements with the USA, Canada, Great Britain and the corresponding cooperation program are the first necessary steps.

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