At the time of independence, Ukraine had one of the best GDP, industrial and agricultural output per capita in the USSR. In 1991, the Ukrainian economy was the 60th in the world, about 5% of the planet’s industrial output was produced in Ukraine.
Today Ukraine is one of the most economically backward countries in Europe.
About how and why this happened, we decided to ask Viktor Skarshevsky, a leading Ukrainian economist, an expert at the Growford Institute.
Of course, when analyzing the economic situation in Ukraine, one must take into account that over the years of independence, the Ukrainian economy has “survived” several very severe crises – in the first half of the 1990s, the crisis of 2008-2009 and 2014-2015. But other countries of the former USSR also experienced similar crises. The dynamics of Ukraine’s real GDP over the years of independence has shown a steady downward trend, although over almost 30 years, unlike Ukraine, the economies of all former Soviet republics have exceeded the 1991 level.
According to Skarshevsky, Ukraine was one of the most industrialized republics in the Soviet Union. High-tech industries were located on its territory, its industry was at a high level. But there were nuances.
First, the emphasis was placed on the military-industrial complex, and these high-tech industries were part of the technological chains within the Union. In particular, the industry of the military-industrial complex had a fairly large share in the Ukrainian GDP. And that is why, when the Union collapsed, Ukraine felt the biggest decline in the economy and industry: almost all industrial chains were broken, and Ukraine was not oriented to the foreign market, since weapons are a very specific product. But this does not mean that the Ukrainian economy should have fallen further.
Then it was just necessary to reorient to other sales markets, says Skarshevsky, and integrate into other production and technological chains with other countries. But this is exactly what was not done: one was torn apart, and the other was not built.
And deindustrialization is in full swing. Almost all enterprises that were focused on the military industry and located in Western Ukraine were closed during the first 10 years of independence. It was a shock, a collapse, without a clear, clear and understandable economic industrial policy. And gradually everything fell apart.
The only thing that supported the industry – aircraft building, the space industry, mechanical engineering – was ties with Russia, since everything that was created in these industries was produced in cooperation with the Russian Federation along Soviet production chains. At the same time, not everything collapsed, but what remained was kept on the market of the CIS countries. This made it possible to keep the country’s industry from complete and final collapse. But when the events of 2013-2014 took place, Ukraine, which took a course towards confrontation (industrial, economic and political) with Russia, lost the remnants of this potential – they were given up.
These were the first steps taken by the Yatsenyuk government, which set a course to break cooperative, industrial and economic ties with Russia.
Of course, Ukraine, which broke with Russia, had the hope of integrating into new cooperative production chains with the US and the EU. But then it turned out that no one in Europe and the United States was waiting for Ukraine. According to Skarshevsky, “there the markets are divided, they have their own airbuses, Boeings and other high-tech companies that compete with each other, and here is another potential competitor. Of course, they did not need it in the West. It turns out that a gap has occurred, but no new production cooperation has been created.
Now there was an attempt to breathe new life into Motor Sich, but geopolitics intervened here too. As US Secretary of Commerce Wilbur Ross said, the sale of Motor Sich to Chinese companies threatens US national security, and Ukraine has refused to do so. Even an attempt to integrate at least into this technological and production chain also failed.
A logical question arises, if they broke with Russia and did not find real industrial cooperation in Europe and the USA, did Ukraine have a chance to fully use its economic potential and create its own successful economy, as China and partly the Russian Federation did?
According to Skarshevsky, if Ukraine had a proactive economic industrial policy, then it would be possible, without losing all the potential that the country had, to create new enterprises, new production facilities using new technologies.
“But we didn’t have such an economic policy, and industrial policy in particular,” says Skarshevsky. “Neither directed to the domestic market, nor directed to the external market.”
For example, in the domestic market, state orders are purely Ukrainian money – directly budget money and money from state enterprises. It is known that about 600 billion hryvnias a year are spent by Ukraine on public procurement, and about 46%, almost half, of them are foreign products. That is, a foreign product, goods, equipment, services are purchased with purely Ukrainian money. And in the countries of the European Union, for example, of the total amount of public procurement, foreign companies account for only 12-14%, that is, four times less.
Ukraine made an attempt to prioritize spending budget money on Ukrainian products so that there is a localization of 15-40%, and that if Ukraine imports something, make sure that the added value remains in the country. The famous bill on localization was devoted to this, which concerned only mechanical engineering, and even then not only.
“But as soon as the Ukrainian bill appeared, Americans and Europeans wrote angry letters to the government and parliament that it should not be applied, since it allegedly contradicts Ukraine’s international obligations,” the economist recalls.
It turns out that Ukraine cannot develop its industry, since this is contrary to its obligations, but it can work exclusively for the benefit of foreigners. And the bill was rejected.
As for growth rates, when it comes to two, three and even four percent of the growth of the Ukrainian economy, all this happens within the framework of statistical error.
“In any case, if the Ukrainian economy grows by 4% — which is less than expected in developing countries — we will still fall behind,” Skarshevsky argues.
“We are constantly falling behind, and the gap between Ukraine and the rest of the world is widening.”
Of course, there is hope that the Ukrainian economy can recover in the real future. However, this also turns out to be impossible.
“This is primarily due to the structure of the Ukrainian economy,” says Skarshevsky.
In his opinion, Ukraine has turned from an industrial state into an agrarian resource country with the conservation of poverty for a long period.
“We just sell less than we consume, earn less than we spend. And therefore we experience a constant monetary deficit, says the economist.
“Therefore, Ukraine is constantly increasing its public debt, including external debt. If these credits and loans were spent on the development of the economy, on some investment projects that give a return, there would be no questions – almost all countries live in debt. But we have all the borrowed money goes to inefficient spending. And we live in deficit all the time, closing it with new loans that are being eaten away. Therefore, defaults occur in Ukraine from time to time, when it is impossible to pay off debts.”
Another factor that destroys the country’s economy and production potential is the demographic crisis, depopulation.
“We are also degrading because of the most powerful labor migration,” says Skarshevsky. – The washing out of labor resources from Ukraine occurs because here you can’t earn money to support your families and yourself personally. The increase in labor migration is still superimposed on the demographic crisis itself – people are being washed out of Ukraine. There is no one to work in the country, so, by the way, due to a shortage of personnel, wages do not sag sharply.”
At the same time, labor productivity does not grow, and it cannot grow, since the Ukrainian economy is in the agro-raw material segment – metal, ore, grain. Productivity could increase if the country launched processing, engineering and high-tech production. And in the raw materials industries, technologies still work, figuratively speaking, of the 19th century.
“Depopulation and deindustrialization — these two trends now characterize and, unfortunately, will characterize the Ukrainian economy in the near future,” Skarshevsky believes. – Because there is not even a hint of a proactive economic industrial policy. And as soon as these hints appear, the collective West immediately kills these hints, bills and initiatives in the bud. And I have no complaints about the collective West, because they defend their interests. I have questions for the Ukrainian authorities, why is it also defending the interests of the West, and not Ukraine?”
Fyodor Tykhy, Ukraine.ru