Austrian think tank identifies need for improvements to Ukraine’s reconstruction plan – Vindobona.org

Ukraine has already been scarred by the war with Russian separatists in the east of the country since 2014, and this has already had considerable socio-economic consequences. But since the great Russian attack on Ukraine, the country is at the mercy of an all-out war.

The country was embroiled in fierce fighting which destroyed infrastructure, industry and the economy. The Ukrainian government presented a national recovery plan for reconstruction in July.

According to the Vienna Institute for International Economic Studies (wiiw), problems are to be expected with overestimated growth potential, as well as problems with priorities and a decentralized approach. Tax cuts are also counterproductive despite huge financial needs, but reforms for EU membership are viewed positively.

Overestimated growth prospects

The full cost of reconstruction is not yet clear, as the war continues and Russian troops are currently causing enormous destruction. The Ukrainian government estimated the total cost of reconstruction over ten years at $750 billion in July. This includes military spending. Two-thirds of this sum, ie 500 billion dollars, should come from foreign donors, the rest from private investors. Excluding military spending, the Ukrainian government expects 450 billion dollars of necessary foreign aid. Assuming that the most intense phase of the war will last until mid-2023, the study assumes that international donors will have to contribute slightly less, around $410 billion, for reconstruction. This amount is consistent with other relevant estimates. “Of course, this is still a huge sum. The EU, which has every interest in Ukraine being democratic and prosperous and which has, after all, made the country a candidate for membership, will therefore have to massively intensify its efforts in this area,” underlines co-author Richard Grieveson, deputy director of wiiw.

The reconstruction plan’s target of a fivefold increase in economic output from just over US$100 billion this year to US$500 billion in 2032 seems unrealistic, as a comparison with other countries suggests. former war zones. Bosnia and Herzegovina only managed to triple its GDP between 1996 and 2005, while Croatia doubled its GDP between 1994 and 2003.

Questionable prioritization of certain industries and distribution of funds

The distribution of funds between sectors is not well justified in the reconstruction plan. For example, defense and security funding needs are estimated at just $50 billion through 2032. This amount already includes allied military aid for that year. Considering the high intensity of the war and the immense challenges of defense industry reform and modernization of the Ukrainian Armed Forces after the war, this amount seems too low.

The classification of heavy industry and agricultural production as high value-added sectors to be prioritized in reconstruction and supported with billions of US dollars is also dubious. “From our perspective, this represents a retrograde industrial policy of preserving existing structures instead of pushing the necessary structural change towards a sustainable and green economy,” said Michael Landesmann, former chief scientific officer of wiiw and co-author of the study. , Complains. However, Ukraine has great potential, especially in the IT sector and in environmental technologies.

Moreover, the instruments for achieving the set objectives, the administrative implementation and the funding remain largely unclear. The planned stimulation of mortgage credit with no less than 40 billion dollars or the recapitalization of Ukrainian banks with 15-20 billion dollars seem equally questionable.

Decentralized approach instead of state control

The authors of the study identify a major weakness in the decentralized approach of the reconstruction plan. It plans to concentrate reconstruction projects in certain regions under the direction of an international partner. Great Britain, for example, has agreed to take charge of the reconstruction of the Kyiv region, Denmark wants to concentrate on Mikolaev and Sweden on Odessa. How such a decentralized system is supposed to work remains a mystery. “Centralized reconstruction programs need to be designed and managed at state level to have nationwide impact. Just think about building inter-regional transport links or aligning reconstruction efforts with EU standards “, explains Tetiana Bogdan.

Problematic tax reduction plans and obstacles to EU membership

The reconstruction plan also includes measures contrary to EU law, such as a ban on VAT refunds on raw material exports or massive state subsidies to heavy industry. Plans to reduce the tax rate to 30% of GDP, while at the same time hundreds of billions of US dollars are needed for reconstruction and the public debt ratio must be reduced, are also not more well thought out.

Weaknesses and strengths of the national recovery plan

The plan shows huge efforts, but also has several shortcomings, according to wiiw. The wiiw explains that among the highlights are efforts to tackle institutional reforms, curb the power of hitherto ubiquitous oligarchs and bring Ukraine closer to EU standards. It also correctly identifies and develops the short-term measures needed to stabilize the Ukrainian economy.

“The weaknesses, however, are also clear,” says Tetiana Bogdan, scientific director of the GROWFORD Institute in Kyiv and visiting scholar at wiiw. “It starts with the fact that the growth potential of the Ukrainian economy after the war is overestimated. Adjustments are also needed in the distribution of funds between sectors, as well as in industrial policy and financial sector plans”, Bogdan said.

The plan’s stated intention to cut taxes massively is incompatible with the hundreds of billions of dollars that reconstruction will consume. The proposed decentralized approach risks having a counter-productive effect: “In most cases, reconstruction should be coordinated at the national level”, emphasizes Michael Landesmann. The study also criticizes inconsistencies and overlaps in content as well as partially incorrect prioritization.

WIIW Vienna Institute for International Economic Studies

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