What investments in human capital will Ukraine need in long term?
People are the main asset of the economy, not only in Ukraine but also around the world. Given the war and massive forced migration, it is important to replenish human capital and invest in this area, taking into account the EU experience
In this article, you will find out:
- how the war has affected human capital;
- what three approaches are needed to restore Ukraine's economy;
- how an IDP from Donbas opened 6 businesses in Ukraine with the support of the EU;
- what investments in human capital Ukraine will need in the long term.
How the war has affected human capital
Dmytro Lyvch, Executive Director of EasyBusiness, Head of Analytical Department at the Center for Economic Recovery, told Espreso.
According to him, the full-scale war has hit all sectors of the economy.
"In fact, the impact of the full-scale war was quite significant. In 2022, the Ukrainian economy declined by 29.2% compared to the GDP of 2021. But it should also be understood that this impact was not uniform in terms of regional distribution. The southern regions, partly the northern regions, and the eastern regions suffered much more than the western and central regions. Also in terms of the size of enterprises. Small and medium-sized businesses have suffered more than large enterprises," said Dmytro Lyvch.
In terms of economic sectors, the agricultural sector has suffered very significantly.
However, according to the analyst, the Ukrainian economy has suffered less than international financial institutions had predicted due to the steady performance of small, medium and large businesses. The latter predicted a drop of about 35-40 percent.
At the same time, Dmytro Lyvch emphasized that the impact of a full-scale war on the economy is calculated not only by the impact on the gross domestic product, but also on human capital.
"We at the Easy Business think tank and the Center for Economic Recovery recently held a large-scale event on the future of human capital in Ukraine and presented a study that assessed the impact of a major war on human capital in the long term. The estimate is about USD 255 billion of lost GDP in the next 10 years if we do nothing," the expert said.
What are the three approaches needed to restore Ukraine's economy?
According to Dmytro Lyvch, analysts have done a thorough job of forecasting what the future of the labor market in Ukraine might look like, how to return refugees from abroad, and how to better integrate IDPs, war veterans, and socially vulnerable groups. This is a complex issue that needs to be addressed, the expert emphasized.
"And if we talk about human capital in general, the short-term impact is mainly due to the affected infrastructure, healthcare, social services, and education. If we talk about the long-term impact, it is a possible drop in productivity. And here we need to understand that if we want to restore the economy and develop it at a rate of at least 7%, which is necessary to double Ukraine's gross domestic product over the next 10 years, we should consider at least three approaches," said Dmytro Lyvch.
The first approach is quantitative. It is about the return of our citizens, as well as the possible involvement of foreign labor in the restoration of Ukraine.
The second approach is the productive or quality approach. It is all about investing in labor productivity.
"This is a topic that is being discussed not only in Ukraine but also in the European Union. A week of small and medium-sized business development in the EU countries was recently held, and the topic of skills was one of the most important, along with the topic of green transition, as well as digital transition and the development of the European Union's single market," said Dmytro Lyvch.
The third approach is a comprehensive one. It includes the return of Ukrainians home, greater involvement of socially vulnerable groups, improvement of existing jobs, and further productivity gains in the medium and long term.
How an IDP from Donbas opened 6 businesses in Ukraine with EU support
Ukrainian Serhiy Kuzmenko worked as a priest in prisons and in 2017 decided to start his own business. With the money he had saved for his dream vacation in Spain, he bought special equipment for water purification. According to the man, the water in Donbas, where he comes from, is terrible, so the service had to be in demand.
That's how the first workshop in Dobropillya appeared. The demand was really high. In addition, Serhiy Kuzmenko volunteered and delivered purified water to the defenders in the east. Three years later, he realized that he needed to expand his business geography, so he applied for an EU4Business grant.
"We started looking for more, and the second grant we received was USD 7,000. It was a real amount that helped us open another workshop," the entrepreneur said.
He opened another workshop in Novodonetske.
However, February 24, 2022 changed everything. The business had to be relocated. First, the equipment was moved to Lviv, and then the family decided to settle in the capital. They started in a shop on Dnipro's right bank, then opened another on the left bank, and later opened two locations in Irpin.
Thus, we managed to create a small network from two locations in eastern Ukraine. There are now six companies operating: two in the capital, two in the Kyiv region, Dobropillia and Dnipro. The business continues to develop even despite the full-scale war. The only plans are to expand and introduce new formats of work.
What investments in human capital will Ukraine need in the long run
According to Dmytro Lyvch, human capital development is a complex issue that involves effective interaction between the Ukrainian government, the public, representatives of small and medium-sized businesses, and Ukraine's international partners.
According to the expert, it is now important to invest in retraining and training programs, as well as in programs to enter foreign markets, because exports must grow. The more Ukraine exports, the more foreign exchange earnings it generates. It also helps to stabilize the national currency.
"Access to cheap credit and investment is the key to sustainable recovery and development of businesses affected by the full-scale war," emphasized Dmytro Lyvch.
He expressed hope that the business will continue to develop, be sustainable, and the Ukrainian economy will begin to recover.
"If we talk about the Ministry of Economy's forecasts for growth in 2023, there is a positive trend. The Ministry has adjusted its forecasts to 4.8% economic growth in 2023. And in the context of a major war, this is an achievement of many participants in this process," the expert noted.
He recalled that under the Ukraine Facility program, Ukraine will receive EUR 50 billion in aid from the EU over the next 4 years, part of which will be used to overcome the state budget deficit and part of which will be used to prepare Ukraine's accession to the European Union. According to the analyst, EU membership will open up new opportunities for Ukraine in terms of attracting investment, international trade, and productivity.
At the same time, part of this aid will be used to develop the private sector.
"If we want to grow by 7% annually, we may lack about 4.5 million people. That is why the efforts of the state and public organizations are now aimed at retraining the workforce, improving access to the labor market for those people who, unfortunately, are not able to find a decent job, retraining people, investing in education, including specialized education. This issue is one of the priorities of our country's development," Dmytro Lyvch summarized.