Preparing for recovery Ukraine should re-plan its economy - economist Reinert

After a dramatic fall of more than 40% this year, the Ukrainian economy is trying to adapt to the war conditions. The Spanish consulting company focusing on economics gathered the expectations of the leading investment companies from all over the globe and they`ve got two forecasts, an optimistic one for the next year about 5% of growth and a pessimistic one about 5% of decline in the upcoming 2023. What are your expectations about the Ukrainian economy next year?

Well, I think we have to look at the background of the Ukrainian economy over the last decades. Unfortunately, the Ukrainian economy has been shrinking. So if you look at GDP per capita in all the former Soviet former countries, Ukraine has had a negative growth. The problem with that is partly that you have been deindustrialized. Ukraine has had a great agricultural economy, a great mining experience and a great industry. And too much of that industry has been lost. And I think you have made some not very fortunate agreements with the European Union. You signed the agreement with the EU on more than a thousand pages and I understand members of parliament who say that very few people have read it. So in a sense you came to believe too much in the market and the market under the Soviet system was integrated. When these integrated nations were chopped up often a lot of industry was lost. I think now is the time to think about the Ukrainian recovery process. After World War II Europe had a European recovery plan, the Marshall Plan. It was about reindustrializing, countries` industries that had been lost in the war, including Germany. And it was very successful. I think you will have a way of good will from all over the world. I think you should try to use that good will and put into a system which I will call Ukrainian development plan or recovery plan (that is the word that was used after World War II) and try to coordinate: what is that we have, what skills do we have and where do we want people to invest and of course countries that positively want to import from Ukraine. The question is what industries shall we try to build. Because in the situation where you are, you should know that the market is not the solution. You have to do a bit of planning, just like you see China is doing these days, even the United States is doing these days. I think there is a lot of coordination to be done and that way of good will that will hit you, you could use that very wisely. We also see that some industries were lost because of the EU actions. For instance, your export of steel tubes that the EU did not want to have the right to use scrap iron. There were some incidents over the last 10 years that you should analyze again and come up with a coordinate wish list. I think this coordinated wish list of what you want to do with the recovery program called the Ukrainian Marshall plan. I think if you coordinate well it can do a lot of good, because in the situation you`re in the market, as I said, is not very good.         

But you`ve compared the situation in Ukraine right now with Marshall`s plan after World War II but at that time the world had paid more than 125 billion dollars. How much will the world pay to rebuild Ukraine? Who will pay and where should we get that money?

I think you will not get money to cover your trade deficit. If you say, please pay our trade deficit, they will not do that. You have to target in this sort productive, there are still some state companies around Ukraine which are at a loss, if you coordinate that, I’ve worked with the industrial committee in the Ukrainian parliament, if you set some kind of coordinating office like in Marshall plan was, then you should get impact from industries where you have capacity, and then you have to try to much that capacity with the good will that you get free importing things without duty things like that. And that will be very useful. I think it's a matter of coordination in a sense. I think politically it won't be a problem to get all these people coordinating from all the political parties. I think that will be possible. 

Now I have a question about the Ukrainian national currency. Since the start of the full-scale invasion hryvnia has weakened by 25% so far. But the national currency has shown an alarming stability over the past few months and some experts say that is a kind of compressive spring effect. Do you agree and do we have to expect the weakening of hryvnia?   

Normally in the situation like that, you would see the tendency for weakening. The problem is that the war had not ended. I am not an expert on the monetary side. I've got some friends who do that, my strength is more on the productive side. I think you have had similar problems like Georgia. Georgia also wanted to be a democracy and a market economy, they also had an enormous trade deficit. Unfortunately, the advice you get from the EU, from the World Bank and the International Monetary Fund are not the best kind of advice. So before I`d tell you, years ago Belarus had much lower wages than Ukraine. Belarus has not played the democracy game and unfortunately, if you want to be a friend with the World Bank and IMF you have to accept more free trade and a country will lose it. So a not very sympathetic government country like Belarus has been doing well, has been doing better than Ukraine in terms of wages, because they actually continued the kind of industrial model that always used to have. So, free yourself from the IMF and the World Bank and of course partly from the EU.

Where should we borrow money? Where can we get the funds and what should we do with the debts because we`ve got lots of them, like billions of dollars?

You may have to do like Argentina has done. That’s just my consideration, I don`t know enough, but I think your long term trade problems can only be solved by increasing your production and increasing your sales abroad. The world’s support will help do that. So I can`t help you with that. It's very problematic and the interest that you have to pay is also very problematic, but it's a different subject.

We still do have another problem like millions of Ukrainians have already left Ukraine and they continue to do so. How will this affect the military economy of Ukraine when the war ends, so what should we do, when millions are abroad?

I think one of the reasons that you accepted more than a thousand pages from the EU, without reading it properly, was that you wanted a visa free regime, you wanted Ukrainians to be able to work in the European Union. I think that`s a very sad situation that when the main export of a country becomes its most skilled people and this is what we have seen in many countries like Mexico, we`ve seen it in Argentina, in many countries and maybe the variation and default is part of solution to that, maybe something you`ll be able to negotiate. As I said, you are having a fortunate and enormous good will from all over the world. Perhaps you will have to take a look at what the United States are doing at the moment. This is upsetting the EU so much, we are all manufacturing industries and we have to learn from China. Try to take a big picture of that and see their rules are breaking down and you shouldn`t be the country following their rules.

Thank you. That's very interesting but according to your advice Ukraine has not only to consider the EU as a main economic partner, but to have trade with countries e like Georgia, Moldova or Belarus before the war. So is this the recovery plan?

No, I think that is part of the recovery plan. It will be easy to export to all the countries. Perhaps your industries will not be protected enough, for instance I remember the purchase of locomotives from General Electric. This was something where Ukraine was very good at, I mean the railway, you should become a bit more nationalistic on the industrial front  and that is what the US is doing these days. The French are protesting it, but the US are doing that despite Macron’s protest. You should be able to follow that. The thing has always been in trade - like the Americans said in the 19th century: don`t do as the English told, do it as the English did.

That's very good advice.

That still works. The countries like Uzbekistan which went much further than you, have had import substitution, which has been successful. They didn't produce buses and trucks, and now they do it. I think the EU talks about smart specialization, but there is also a specialization which is not so smart. That is selling wheat to the EU, to Italy, for let's say 120$ a ton and then buying the same wheat spaghetti for 250$ a ton. So, these things you should look at, are not a trade theory, but the one that works every time.

I just wonder, can you name a country as an example for the recovery plan Ukraine can follow?

Well, it sounds very strange but it's Uzbekistan.

Uzbekistan

In all the aspects. We`ve made some statistics about that, looked at all countries that used to cooperate, looked at what country has been doing well, what country has been doing poorly, and with other economists we came to the conclusion that it was Uzbekistan. Well, when you go to shop in Uzbekistan and want to buy spaghetti there is a blue kind of spaghetti which costs a hundred and then next to that there`s local Uzbek product which is slightly different blue colour, but costs 60% less than the original Italian product. I think you may have go back to these things, you are doing great things like sunflower seeds, there are things that are adding value to your products.

That's the solution. 

Yes, it is.

To start producing our own Ukrainian spaghetti.

That’s right.