Lately, a lot of statements have been made on the necessity of the new economy recovery plan for Ukraine that would be similar to the Marshall Plan, implemented by the American administration in the post-WWII Europe. Back then, the implementation of this plan contributed to both economy recovery and shielding Central and Western Europe from diffusion of the communist ideology. The necessity in such recovery program has already scored a response from renowned American financier George Soros and from several German and French politicians and civil society activists. In March 2017, this idea has been supported by influential European People’s Party. Now, this process is headed by Lithuanian politicians: ex-prime ministers Andrius Kubilius and Gediminas Kirkilas. Along with a group of Ukrainian MPs they have already visited several European countries and Washington D.C. in order to brainstorm the ideas for this Plan and look for the means of its implementation.
In Ukraine, the initiative of elaboration of such of a Plan has been supported by both – the President and the Prime Minister, in addition to the parliamentary group mentioned above. It has been mentioned, notably, at the Ukraine-EU summit in mid-July 2017. The matter also attends further discussions during the Eastern Partnership’s summit in autumn.
This means that the idea is not a new one. It came up firstly in 2014-2015 on the crest of the wave of Western support of post-Maidan Ukraine. However, at the time the official authorities gave the highest priority to the agenda of liberal reforms, aimed at economic and financial stabilization and deregulation, reducing the role of the State, replacing its institutions and top-management. At the first stage of reforms, the issue of economic growth in the policy documents was considered as secondary and such that would solve itself in the future as a logical result of institutional changes. However, virtually absent growth for three years is more and more frustrating for Ukrainian citizens and international partners, moving the question of additional measures to the next level. This is what generates a wave of interest to the Marshall Plan for Ukraine. Is it possible to implement such an initiative today? Is it needed not only by us, but our partners as well?
Obviously, the theoretical possibility that someone from abroad would bring plans and money for “Ukrainian economic miracle” looks very attractive. However, the idea would become clearer after answering some direct questions.
Is there any specific idea or project for this Plan? Who is preparing or will prepare it and what is its aim?
The experience of discussing the idea shows that at the moment everyone has their own idea of the goals, sources of financing, performers and beneficiaries of this Plan. Someone thinks it should accelerate the reforms. But accelerating the already launched reforms does not require a separate plan or additional money. These plans are already drawn up and money is allocated, but they are not spent in full, either because of lack of projects, or because of the institutional failure of the State apparatus. Thus, the Marshall Plan, although it should be an integral part of the overall reform program, cannot have anything to do with the next financial assistance project, which is primarily a capital investment plan.
Some supporters of the plan's idea see it as a list of major infrastructure projects, such as an autobahn from the East to the border with the EU or new airports, or something else grand enough, which would demonstrate rapprochement with the European Union. There is also an idea of the plan as to the organization of foreign investment in the amount of 4-5 billion euros per year, which should accelerate real GDP growth from 1.6-1.8% forecasted for this year to 4-5%. The nature of these calculations is unknown. Such a volume will certainly not affect growth, as it is the usual level of foreign investment in recent years. In addition, it continues to be about loans from international financial institutions (IFIs), which would increase anew the already huge government debt and which should be returned mainly from the budget. If we want to see private investments in infrastructure, which Ukraine really needs urgently, then the projects should be financially remunerative, but the mechanisms of investment that would ensure the return on investment (such as, for example, public-private partnership) are currently not working.
In general, the impression is that there is no clear idea on the Plan among any of those who talk about it. There is only an idea of a plan, the implementation of which may either be a success or a disappointment for the country and its partners.
We propose to work out a fundamentally new Plan aimed at the geostrategic victory of Ukraine and its Western partners in this region, as well as the establishment of a balance that should eventually be transformed into a world based on the "win-win" principle. The exclusively military victory, which a priori implies the opposition of the winner and the defeated, will never be able to satisfy all sides of the conflict, and, accordingly, cannot guarantee a sustainable peace. Attempts for a political settlement also periodically come to a standstill. The war lasts for the fourth year and its ending is not visible. This is a very long time for the region in the center of Europe. The conflict is depleting and gradually destroying all its participants. Instead, the economic victory has the highest potential for resolving the problem. Our victory will be indisputable when Ukraine becomes a dynamic, modernized State with a high level of technology development in industry and agriculture, a high level of well-being, high rates of economic growth and human capital development. According to all these indicators Ukraine should exceed the level of the CIS countries, including the Russian Federation, and become an example of success for the citizens of the post-Soviet States as a result of the correct geopolitical choice. Only for this purpose, the Marshall Plan is really needed as a joint project of the people of Ukraine and Western civilization.
In 2015, the Institute for Social and Economic Research (ISER), in its study "Policy of Economic Pragmatism" (PEP study), offered very practical proposals and calculations on how Ukraine could achieve GDP growth of 7-10% per year, which, if implemented, could in 10 years double the real GDP of the country... But the officials begun to speak about the need for a 7% increase only now, but unfortunately, nothing has been done for this, and we have a miserable 1-2% a year, thanks to the strong support of IFIs and donors. If everything continues like this, then this is the path to economic recession forever.
Obviously, the "Marshall Plan" for Ukraine is exactly opposite to the current reform program, since the latter does not include real steps for accelerating economic growth. It should become the second stage of a rocket carrier, which comes into action when the first has fulfilled (or should have) fulfilled its function. To implement the Plan there is no need to create an entirely new program - it takes a lot of precious time and money. We already have everything, we need only, with the participation and leadership of the Government and the help of donors, to consolidate all the work in one plan, in order to unite society and start its realization around it.
Why do we need a new plan: were the previous ones unsuccessful, insufficient and need a new impetus?
Ukraine was always been provided with Western assistance. Its volume and rigidity of requirements depended both on the degree of interest of the partners in Ukraine, and on the domestic political situation in the country. Over the past three years after the Maidan, Ukraine has received significant amounts of loans and credit facilities (both systemic and investment) from IFIs, macro financial assistance and budget support programs from the European Union (both on return and non-returnable basis), guarantees for placing on the international market of valuable assets for Ukrainian government securities from the United States (USA), numerous technical assistance grants from separate governments and private foundations to support institutional reforms (even pay for civil servants), and so on. In general, these measures were formed in the Memorandum on Economic and Financial Policies between Ukraine and the International Monetary Fund (IMF), and then they were split into separate components supported by other donors or partners on the basis of the "money for reform" principle.
Did such assistance affect the speed and depth of the country's reform? Practically no, because performance indicators were considered to be the implementation of formal intermediate tasks (for example, the adoption of a law), rather than the achievement of a specific result (for example, the receipt of a certain amount of investment as a result of the effect of new laws). On the other hand, the evaluation of the results is problematic and because, depending on the political context, we hear from the leaders of the donor governments and IFIs that they are "shocked with the volume of the changes that have taken place", but on the other that they are "dissatisfied with the pace of reforms, as well as their results". As for the reports of the Ukrainian government, we read about the enormous amount of work done, the documents adopted and the created working groups, but we see few results that are felt by the citizens (increase of investments in the country, increase of positions in international ratings, etc.).
Of course, further investing in improving processes and institutions will have a certain effect, but will rather lead to disillusionment with long-awaited results. Recently, some officials have already started to say that reforms are not being made quickly and we will not see the results soon. It is obvious that the success of the new plan requires an audit of the already made and reorientation of the country to obtain rapid results in economic growth, the creation of new jobs, a real increase in the welfare of the population and in general the growth of competitiveness of the country.
Is there a real team in Ukraine capable of realizing this Plan (in case of its adoption) and who are these people?
It is impossible to develop and implement the Marshall Plan for Ukraine beyond the government. No one will give money to this Plan, if it will only be a public-private initiative even on an international scale. On paper, such an initiative will be supported, but no one will give money for it. And this is a big problem, since the government (as an institution, and not its specific composition), at this time, alone can neither develop nor implement such a Plan. Not because there are no professionals inside of the government who are able to do this - they are still there. The problem is that the government is hopelessly focused on the current problems of survival and on the process of implementing various international agreements, which provide external assistance to Ukraine. The government can copy the reforms undertaken by other countries, but practically cannot develop his own reforms that would be supported by Ukrainian society and take into account the dynamics and prospects. Unfortunately, the function of generating own ideas has died out at some stage because of the low demand for it.
In such circumstances, in order to develop the Plan, it will be necessary to create a joint team (government and experts), which should be headed by a government official not less than the vice prime minister and who should collect for this work the best Ukrainian economists and management experts, who already had an experience of development such programs, as well as foreign advisers who would represent the interests of potential investors and donors and also had the experience of developing such plans. Alternatively, it may be a government agency with a minimum number of staff, but with broad powers of engagement of experts, or non-governmental organizations, but under the patronage of the President of Ukraine and the Prime Minister of Ukraine.
This team should be involved in the design and implementation of the Business Association Plan, the Association of Employers and the Trade Union as a source of external initiative and the key to taking into account and balancing the interests of those they represent. Particular attention should be paid to the interaction with the donors of the Plan. From the very beginning, it is necessary to agree on a boundary between interests and powers and to form a common view of the result and responsibility. For example, if there is a common agreement to direct efforts and funds for the development of agricultural machinery in Ukraine, then this consent must be converted into specific factories, tractors and combine harvesters of Ukrainian production. It is also necessary to take into account the interests of foreign corporations supplying such equipment to Ukraine, the interests of equipment manufacturers for such production, the interests of owners of existing Ukrainian enterprises, suppliers of components and spare parts, metallurgists, producers of agrarian products, State authorities and local self-government. These interests can be quite different, but only reaching agreement will yield results. To do this, we need a team that can write not only general slogans, but also take into account interests and demonstrate the benefit to each of the participants. In this case, donors will need to provide access to the monitoring of the movement of all funds and the "veto" right to block such movement, if the funds allocated improperly, or become aware of the facts of theft, or there is no result for a long time.
There is no such team in Ukraine today. It needs to be shaped and this, in our opinion, is one of the key conditions for the development and implementation of the Plan.
Is there an understanding of who can provide the funds for the implementation of this Plan, and how much it is needed?
According to the model calculations of our Institute's experts conducted at the end of 2014 - early 2015, in order for GDP to grow 2 times over 10 years in real terms, it is necessary for these 10 years to invest in the economy the capital investments in an amount equivalent to 600 billion Dollars USA, that is on average 60 billion dollars US per year. We departed from the fact that even during the crisis period of 2015-2016, the Ukrainian economy generated 11-12 billion dollars US of investments in fixed assets. That is, there are still 50 billion dollars US annually.
According to official figures, foreign capital investments today (their share is about 3%) do not make a significant contribution to the development of the economy. Even those investments were, in essence, Ukrainian investments at the expense of funds previously moved to the offshore. The main share (60-70%) is made up of enterprises' own funds.
Foreign direct investments (FDIs, including both capital investments of foreign investors) are also negligible. According to official data of the Ministry of Economic Development, the amount attracted from the beginning of the investment of foreign direct investment (equity), as of December 31, 2014, amounted to 37.7 billion dollars. USA. It is almost 1.3 billion dollars. Less than at the end of 2010, and by 16 billion dollars US less than by the end of 2014.
Such figures provide eloquent evidence that the current program of reforms, despite the intentions of deregulation and the improvement of the investment climate, did not bring results in the form of attracting foreign investment. Although FDIs in 2016 increased, compared to the previous 2 years, and reached $ 4.4 billion, their lion's share (64%) made from contributions to the capital of foreign financial and insurance companies, which led the Russian Federation to become last year the largest foreign investor (1.7 billion dollars), ahead of the traditional leader - Cyprus. Here is another proof that the $ 4-5 billion US or euro will not affect the rate of economic growth and that for this purpose not only the volumes, but also target segments of the economy, where it is necessary to direct the funds, are important.
Thus, for the entire period of investment, the volume of FDIs is less than we need to attract in investments (foreign and domestic) annually only in capital. Is not this pragmatism really the romanticism? Everything depends on the goal of reforms in the country and the position of the State. If you move in the same way as now, then it's really a fantasy. If we are to increase the volume of investment as a national priority, which will be subordinated to other areas of reforms, including the fight against corruption, then this is not easy, but realistically, with strong political support from both the inside and the outside. For example, according to the World Bank, the gross accumulation of fixed capital in the Republic of Korea during the period of active reforms from 1960 to 2016 amounted to an average of 130.35 billion dollars US per year. At the same time, since 2000 it has never been less than 168.23 billion dollars US, and in 2016 amounted to 412.22 billion dollars US. Other historical examples can be cited when, in a focused policy, even in the postwar period, countries found the possibility of attracting investment in structural modernization of the economy and high rates of economic growth. It should also be added that investment growth will have a certain multiplier effect. If, for example, under the Plan the funds will be invested in the construction of a new agricultural production plant or in the purchase of equipment for an existing plant, this will facilitate the company's receipt of profits that can be invested into new projects. With new equipment and modern competitive products, the company can apply to the bank for a loan to develop production and invest again. Employees of this company, having received high wages, will be able to save some of their money, which will also be a source of investment. And this multiplication will take place at an endless geometric progression, provided that the State develops and will adhere to the proper policy of stimulating and protecting investment and savings, and will carry out adequate regulation, preventing the economy from overheating and from the emergence of financial crisis.
It is impossible to calculate the volume of investments needed to reach the growth rate of 7-10% as it should be a dynamic model that takes into account the influence of new factors that will arise in the process of investing and their impact will depend not only on economic factors but also on political will, transparency and the effectiveness of managerial decisions. The most important thing is where to invest. As part of the PEP study, we, for example, formed groups of economic activities based on the share of value added in the output and their share in total exports, cleared of the factors distorting the comparison with the addition of added value of innovative products. According to such estimates, the highest priority for attracting investment should be those activities that form a high-tech and export-oriented model of economic development. There are proposals on this issue of the Federation of Employers, are the results of the OECD project "Strategy of Sectorial Competitiveness of Ukraine". And there is more. That means, one can either choose one of the suggested approaches or try to combine them. The main point is to radically change the logic when money is attracted anywhere, as it is now, when investments are purposefully oriented towards the formation of a certain economic model with technological arrangements that will allow Ukraine to become part of the highly developed countries in the future either within the EU or within the framework of the current association. This model should be demonstrated by the government to potential investors and donors and to explain how it will work and what benefits it guarantees for them.
Where to find the funds for investing?
In our opinion, at the first stage, the Fund should be established with the participation of donor countries, IFIs and the Ukrainian government (including through privatization of State-owned enterprises and other State assets, including land) under joint and transparent management. Contributions to the Fund may include funds, guarantees, and other financial and non-financial means that can be used in the process of investing. Under the auspices of this fund, a network of development agencies or a universal institution (such as KfW, which was created in postwar Germany for the Marshall Plan implementation), should be set up, which should serve as a development bank, an export credit agency, an investment company and other functions, depending on the decision on the scope of competences of the Fund set by its founders. In the PEP study, we proposed a model of such an institution called "Development Corporation", which would integrate all institutions into one system (described in detail in the study). But other options are possible, therefore, they need to be discussed.
Another essential function of this institution should be to assist and advise on the development of investment projects, which will be invested through the Fund. Unfortunately, the absence of such projects may be the main obstacle to the implementation of the Plan. The means of the Fund should be allocated, first of all, to innovative projects in the real sector of the economy that meet the defined priorities. It can also be large infrastructure projects if they are aimed at modernization and economic growth and involve the return of invested funds. The co-financing of projects may involve private investors with the right of ownership of the objects invested into, including State-owned enterprises. The means of the Fund in the future may be replenished both at the expense of new contributions of participants, and at the expense of funds from privatization of shares in enterprises being invested by the Fund. Again, I want to emphasize that without active, qualified and transparent participation of the State, all this cannot be realized.
Is there such an institution for the accumulation and management of funds or do we need to create a new one?
There is no such institution today, it has to be created. Theoretically (from the historical experience of the Marshall Plan for individual countries) these functions may be assigned to one of the existing institutions, such as the NBU (National Bank of Ukraine), but, based on the specific circumstances of Ukraine, this should not be done. It is necessary to create a new structure that would benefit from the respect and trust of both domestic and foreign investors.
What are the incentives for the West to prepare and implement hypothetical "Plan A" for Ukraine? Does it need this?
Indeed, why Western countries in the center of Europe, at the intersection of the powerful markets of the EU and Asia, led by China and the Customs Union led by Russia, at their expense create an industrial competitor, which in the future will compete with them in these markets? It seems more rational, with its under-loaded production capacities, to continue to provide Ukraine with some kind of lending support for the creation of State and market institutions and maintenance of infrastructure in an acceptable condition, and to direct investments to agriculture, mining and, possibly, processing of agricultural raw materials or waste. This course of actions means to support the agrarian-raw material model with the outflow of excessive labor force to the EU and the Russian Federation where there is a deficit, and also have a small market for the sale of low-quality goods and old machinery.
But this is a false rationalism and it could be justified only five years ago, prior to the signing of the Association Agreement with the EU by Ukraine, the annexation of the Crimea by Russia, the occupation of Donbas in the same time and the restructuring of Ukraine's State debt, which now again reached 80% of GDP. Now, in our opinion, it is expedient to transform Ukraine from an object that constantly needs help and protection, to a partner capable of helping with the settlement of the situation in the region. Otherwise, everyone will lose:
- Ukraine can turn into a poor agricultural country with a weak domestic market, an unstable socio-political situation, high unemployment and crime, a strong stratification of the population by income levels and a reduction in its size;
- The EU can get a constant source of instability and "gray zones" because of the smoldering conflict, uncertainty in protecting investment in Ukraine, and complicated by sanctions on investment in Russia. Consequently, European business will lose if it forfeits the markets in this part of the world;
- Russia loses as well. The existing regime sooner or later may shatter under the pressure of sanctions and fall. This fall is likely to plunge into the abyss not only Russia, but also Ukraine, part of Europe and Asia. It is impossible to predict the consequences;
- Failure for the US: if Ukraine loses its value as an energy bridge and a transit corridor between Europe and Asia, it will turn into a poor ally, which will require various help without any ability to find self-sustainable solutions to their problems;
- Losses for investors who, while maintaining the current economic scenario, may lose their money invested in Ukrainian securities or loans, because the country simply cannot return its debts and will require their restructuring or relief.
Thus, the Marshall Plan (although this name must be changed to a new own, without historical associations, incorrect in this case) under the conditions set forth in this article, is a rational step for the West. Today, Ukraine is a potentially "profitable asset", brought to a non-performance by poor governance. Someone tries to assign this asset by robbery, someone – tries to sell it more expensive, and someone - cheaper to buy. But this asset can become profitable for all parties and thus to advance the long-awaited victory through the new economy, the new status of a reliable partner and the outpost of Western values in the post-Soviet space. This will ensure stability and security in the region with the help of a "win-win" strategy.
An abridged text of this article was published in Dzerkalo Tyzhnia on the 11th of August, 2017