Podcast “What is about economy?”: Vernon Henderson on the challenges of Ukraine’s recovery

Prerequisites. After World War II and the Korean war, there were successful examples of rebuilding of major cities. However, Germany was quite developed even before the war, while Korea had a growing population. Ukraine has a different context. Ukraine is among the poorest countries in Europe. Since the Soviet era, it had a poor economic growth record compared to other former Soviet bloc countries, e.g. Poland. Its population has been decreasing over the last 20-30 years because of declining fertility and migration to other countries. Ukraine has a historical agricultural base, mostly in the Center of the country. Its Eastern part has been industrial and therefore comparatively more rich. This was heavy Soviet-style industry which was not very competitive in the Western markets. That industry has been declining rapidly even before the Crimea annexation and occupation of parts of Eastern Ukraine. It was propped up by trade with Russia. After 2014, trade dropped dramatically, and looking into the future we don’t expect its recovery. 

So the East lost some of its markets and needs economic transformation. The same situation was in the Midwest of the United States or in the central Manchester area of the UK. Pittsburgh and Manchester are good examples of cities that transformed successfully. These cities have ended up being smaller but still pleasant places to live in. Detroit was not able to successfully transform but it still exists. 

Rebuilding of the East of Ukraine. Among the challenges are enormous destruction in the East, its refugee population that moved to the Western part of Ukraine and then partially left Ukraine. 

There is a hard political choice for Ukraine trying to repopulate the East as much as possible. You can rebuild the cities but will people come back and will there be jobs for them? And if you create the jobs but there is no place to live, you will have problems. We should think over this process. In the first round of recovery we will see which places are doing better, which places people want to return to. Then we will need to focus on more successful places and try to rebuild them.

A large problem, “the elephant in the room”, is that people who can make investments in the Eastern region see the risk of another war, another invasion. Thus, we need a political settlement that guarantees compensation for investors. You need to be able to say: “we have wartime insurance. If you invest here and your facilities are destroyed in a wartime, we will compensate you”. The government needs to have financial capacity to pay off such insurance claims.

Another option is to subsidize investment loans and maybe firms in the East. The concern is that the government will try to prop up traditional industries in the East or demonstrate favoritism. They could give contracts to a handful of firms that are well connected to the government and a non competitive in the market. That would hurt the long term development of Ukraine.

Then what is going to be an economic base of the East? The government can help by providing jobs in government agencies that don’t have to be in the capital, directing more investment in universities, in healthcare, but the cities themselves also need to find new economic basis.

Cities & Villages. We do want people to return to some degree to the East but the problem is for villages. We have seen this in other countries – people leave villages or small towns for larger cities. Ukraine is already highly urbanized – 70% of its people live in cities. The process of depopulation of villages will probably continue and, unfortunately, it has intensified due to the war. A lot of villages will shut down because of the war because they were destroyed, there is nothing left, there are no people. Some villages will survive and find their economic base, e.g. tourism, agriculture or food processing but the rural sector will become smaller. 

Young people want to go to cities for studying, jobs, and exploring opportunities. There has been centralization in Kyiv and we expect it to continue. But probably some other cities will grow as they attract youth from villages.

Housing. Ukraine has a very high rate of home ownership which is really unusual. Ownership issue is complicated. People own their flats, but the land [on which these flats are located] is owned by the state, and it is allocated at the local level in a non-transparent process. We would like to transform it similarly to other countries where the land is auctioned to developers. 

We hope that people who lost their homes are given vouchers related to the pre-war value of their flats or houses. Giving them just their property value will not be enough because replacement cost may be higher than the former property values, especially in the East where market prices were not that high. They probably will need more money to be able to buy a place. 

Ukraine is going to build new housing so don’t make it all Soviet-style flats. Make it different — more energy efficient; allow more choice for people to rent, in smaller cities reduce housing size to more single family homes.

Aid coordination. I spent a lot of time in Aceh, Indonesia. There was a tsunami at the end of 2004 that wiped out the capital city where around a half of a million inhabitants lived. Around 130 thousand people died from that event. So that was not a highly populated area. 

The aid coordination was a bit of free for all, because different aid agencies wanted to impose different types of accounting and we have different interactions with the local and with the national government. The national government wanted to have control over aid, but the Aceh province government had a formal independence in terms of political settlements and also had a lot of control. I expected this also to be the case in Ukraine. Ukrainian recovery is going to be funded by international aid. And each donor has different accountability and different interactions. Ukraine does not have a good record in terms of corruption and that’s going to be a concern for international agencies and how money is spent and how the accounting goes. So you need a good accounting process and data collection that is really underdeveloped in Ukraine now.

There is a discussion about the role of local and central governments in this process. Some plans are proposed to be turned over to the local governments because they have a better understanding of what local conditions are, what they want and what they need. The concern is that these local governments have little experience in infrastructure projects due to the economic conditions for the last 30 years. I think there would be mentors like international governments that “adopt” particular cities and provide permanent assistance on capacity building in the institutional and particularly accounting side.That will help local governments become more proficient.

We are grateful to Elizaveta Dororntseva, VoxUkraine analyst, for the text transcription and Kseniia Alekankina, communications manager, for its editing.