Veronika Movchan, director of research at the Institute for Economic Research and Policy Consulting and a member of the editorial board of VoxUkraine, predicts what international trade will be like and how much Ukraine’s GDP will fall this year.
Listen to the full conversation at the link.
– Veronica, how will Covid-19 affect Ukraine, what factors did you consider in the forecast and what did you come up with?
– Together with Berlin Economics analysts, we considered two groups of factors. First, there are the factors of change in domestic demand associated with quarantine. Unlike other crises, we now have a crisis of active government intervention. After all, in order to stop the spread of the disease, the state stopped some business and resorted to strict quarantine measures. Second, we considered the effect of external shocks. This is, of course, a change in demand from partner countries, in particular as a result of quarantine measures, changes in prices for various goods, income from those who work abroad. The combination of different omissions regarding these two groups of factors allowed to form three scenarios of economic development.
According to our estimates, and with the pessimistic scenario, the drop in real GDP in 2020 may reach 11%. Prior to the coronavirus, we forecast GDP growth of 3%, i.e. a decline relative to our expectations – 14%. The baseline scenario is a 7% drop in GDP. And optimistic scenario, which is not quite different – a fall in GDP by 6%. This drop was caused mainly by Covid-19, but not only. For example, we took into account the weather factor (drought). Of course, we would like to be wrong. So far, even our most optimistic forecast is worse than the forecasts of the Ministry of Economic Development, Trade and Agriculture.
– Do external or internal shocks have a greater impact on falls?
– External shocks have two-factors. On the one hand, there is a deterioration in exports. We expect a decline of up to 6%, which is a moderate decline against the background of the projected deterioration in world trade in general. Some of our partners will grow a little (China, India, Egypt) – these are also countries that mainly consume our agricultural products. In addition, it is assumed that world prices for these products will not fall or will fall less than, for example, oil prices. The worst decline in exports is expected in trade with the EU, our largest partner. EU was strongly affected by the coronavirus. At the same time, the trade balance will improve, and the contribution of net exports will be positive due to a much larger drop in imports compared to exports. After all, there are a lot of mineral products in our imports, and they are now cheaper. In addition, we have significant reserves of natural gas in storage facilities with low consumption. Intermediate demand is falling, consumer demand – too. The whole economy consumes less, which pulls imports down.
– Export bans are a bad trend that kills incentives to reorient production. What then will be the incentive to produce everything?
– And we also produce less. Let us talk about supply chains. This crisis has shown how globalized the world and the economy, in particular, are. No one can produce something on their own, you need a constant exchange of different resources. The pandemic hit the world’s largest economies almost simultaneously. The countries most affected by the coronavirus account for about 70% of world trade. In addition, it is noticeable how production and business connections probably contributed to the spread of the virus. A powerful center for the production of electronics, cars, and pharmaceuticals is in China, Wuhan. In South Korea, 85% of cases fall on the Gumi industrial complex near the city of Daegu. In Germany, the first cases from Bavaria, in Italy, also an outbreak was in industrial Milan, not in tourist Rome. Even in the United States, many were surprised by Detroit. What will be the supply chains and world trade in the future?
– We see how countries ban the export of goods, introduce price regulation. Is the movement towards protectionism continuing? Has the crisis affected the revision of global trends?
– It is unknown what will happen next. We do not know for sure how supply chains will change. Some countries say, “Let’s do something and support trade together,” but protectionism was the first response to the crisis. The closures are related to the agricultural trade, and I’m not sure it was worth it. This is a negative trend that kills incentives to reorient production. Topic with Personal protective equipment (PPE) is sensitive as well. The country needed it while we were trading it. On the other hand, while the ban is in force, production has begun to grow, it is impossible to export, but whether there is sufficient domestic demand is a big question. What then will be the incentive to produce it?
– What would you suggest?
– This is a very emotional topic, but I would not advocate a ban, but for state planned reserves, from practices that work in agriculture for grain exports, where there is monitoring and approval of how much is exported, but there is no direct ban.
Getting back to global trends. Global supply chains will change, but where it will evolve in ten years is difficult to predict. It will be very expensive to return manufacturing to “home” completely, but to move part of the production closer to “home” is real. Although distance is an important but not a key factor in today’s world. We need to look at these supply chains more globally and think about the labor market. We see how large crowds of people becoming a problem. No one can guarantee that such a pandemic will not happen again.
– In recent years, there has been a lot of talk that we need to harmonize legislation with the EU and increase exports. Trade with China is now growing. Can it become Ukraine’s main trading partner in the future?
– No, the EU will remain the main partner. We are already much more integrated with the European Union, but we have only used part of the capacity that has been created under the Association Agreement. However, we often do not notice how far Ukraine has already come in fulfilling its obligations. Our exports to the EU are quite diverse, there are many intermediate goods, which may not be very noticeable “at first glance”. In addition, harmonizing standards with the EU makes it easier to trade with the rest of the world. In China, we carry several “main” items (grain, oil, ore), and this is only 12% of trade. Our exports to the EU are much larger and more diversified.
– Personally, I often roll my eyes from this discussion that “the raw materials economy is terrible, and we all need to launch rockets into space tomorrow,” which is completely incorrect from an economic point of view. On the other hand, every crisis shows that you may not need rockets tomorrow, unlike bread. Not to mention that the agricultural sector in Ukraine is very technological and is developing rapidly. What is our potential in ensuring food security of our own and other countries? How much of the world we can feed?
– We will not feed by ourselves only, at least not yet. Although we have not yet exhausted the potential of the efficiency of our production in agriculture. When we talk about food security, domestic consumption comes to the fore. We are afraid that we will be hungry. In fact, Ukraine now produces several times more than it consumes. We will not eat it all, even with this year’s potentially poor harvest. It is not worth closing the markets.
The discussion “industry versus agriculture” is active. And yes, it is often incorrect. In fact, sectors can develop in parallel. Rather, it is a question of education, the development of private initiative, institutions, especially the protection of property rights, and the rule of law. If this is changed, everything will be much better. And the Covid is the situation when we should think not only about how to survive this crisis individually, but also how to use the opportunities. One of the opportunities is to attract certain productions here, closer to Europe, to be a reliable partner. This will be a large inflow of investment and a breakthrough for the economy.
The authors do not work for, consult to, own shares in or receive funding from any company or organization that would benefit from this article, and have no relevant affiliations