“Ukraine” Project: jumping tiger or crawling tortoise?

Current conditions of the economic development in Ukraine allow the GDP growth of not more than 0.5% during the next decade. Per capita that will be equal to $5,234, if to account the Ukrainian population reduction, down to 40.7 million. If nothing changes, the development of Ukraine will remain at the level of such countries as Namibia or Peru.

In order to reach the level of today’s Poland, Latvia or Lithuania (which have the GDP per capital equal to $9,163), considering our backwardness, we need to have 6-7% GDP increase for the next 10 years. In order to achieve that we need to shift to export-oriented and high-tech model of economic development.  

The discussion around the new model of the country’s economic development has two directions. According to the first one, we have to focus on foreign markets and increase export. The second one accounts self-sufficiency, decrease of import and increase of domestic consumption.

Both models proved their effectiveness in different countries in different periods. Since 1970s, export-oriented development strategy was dominant. We can name such successful examples as Japan, South Korea, Taiwan, Hong Kong, Singapore and other Asian countries, which implemented this strategy of economic development.

Theoretically, export-oriented development strategy may be ensured by full liberalization of trade policies, but in practice, this is not enough. Export can facilitate the GDP growth only with the help of additional incentives, particularly, long-term loans and short-term refinancing loans, tax holidays or reduction of taxes, exemption from duties on imports that are used to produce goods for export, trainings on business internationalization, creation of free economic zones etc. In other words, export boom will not happen only because of liberalization and deregulation.  

The shortcomings of this strategy is its sensitivity to external shocks. After “Asian financial crisis” in 1990s, many countries of the Western Asia shifted to the model of internal demand increase. This model is characterized by improved distribution of national income, by financial stability and effective governance. Implementation of this model does not mean that the country stops exporting. The government simply does not make it a priority and does not make so much effort to stimulate the supply to foreign markets.

At this stage of development, the government balances the tax system in such a way that the rich people would pay higher taxes than the poor ones. Hence, it has a policy aimed at productivity increase and salary increase for the population, and it invests into infrastructure and welfare. The GDP growth rate is moderate in this model.

However, nowadays Ukraine cannot afford moderate GDP growth rate at the level of 1-2%. This will mean a constant lagging behind the developed world, hence, we need to make a bet on the export-oriented economic model.    

Moreover,there are simply no resources to implement the model which relies on the domestic market. The state policy – focused on ensuring the income for the population (by setting the minimum wage and cost of living, increased expenditures for paying unemployment benefits etc.) that will increase consumption, especially consumption of domestic products, vs increasing imports – seems impossible today, in the context of limited budget resources. 

The pillars of export

The export-oriented model of developing Ukrainian economy does not mean a full liberalization of the markets and expecting for some miracle caused by the raw materials export. There should be a complex approach to export increase and simultaneous changes of its structure towards products with high added value.

The state has to create the development strategy for each sector of the Ukrainian economy. As high-tech export is a priority, then the priority sectors for the state support should be also high-tech and simultaneously have prospects at the foreign markets. Those are, for example, IT-sector or aerospace, which are expected to have an annual worldwide increase at the level of 5% or 6.75% accordingly.

The sectors that already occupy leading positions in the Ukrainian export, such as metallurgical production and agriculture, need proper maintenance and support that can be ensured by creating such conditions in which they will operate comfortably. That concerns international agreements on free trade and ensuring appropriate business conditions. The state will support those projects in these sectors which will aim at increasing the degree of processing their products.

The third group should consist the sectors which are currently neither export-oriented nor high-tech but are subsidized and receive income from natural rent, such as extraction of coal and lignite. The state does not have to invest into such non-priority branches, except to make so-called “social investments”, in order to provide re-training of personnel when such companies are closing.

Finally, the fourth group include the branches which are not export-oriented but have potential for increasing the volumes of supply for the international markets and simultaneously can become the state priority thanks to the large involvement of technologies. In particular, that is pharmaceutics. Currently the export of medicine and drugs in the total structure of export is around 0.41%. On the other hand, in the structure of chemical products import in the EU, one of the main partners of Ukraine in the external trade, the share of pharmaceutical products constitute 35.3%, excluding domestic supplies within the EU. Ukraine has a potential for developing this sector thanks to raw materials and cheap labour force. In these sectors, the state has to apply a project principle of funding and other types of the state support.

Hence, Ukraine urgently needs in-depth analysis of the sectors as well as development strategy based on export-oriented spheres of economy. We also need to create institutions which will analyze investment projects in these sectors and support those projects which are promising due to their high added value and opportunities to find markets for their products.

Those may include direct funding, for instance, in case of start-ups, and indirect funding (e.i., VAT decrease for the companies which implement innovative developments). Those also may be negotiations with the investors and search for possibilities to incorporate Ukrainian production into the global chain of value creation. The examples of start-ups’ influence on economic increase is the Australian model, in which, according to the PwC estimates, the development and support of “high-tech start-ups” can provide $109 billion or 4% of the country’s GDP and create 540 thousand jobs by 2033.

Transition to the high-tech and export-oriented economic model is a pre-condition for creating a steadily growing country, which will positively influence the standards of living of ordinary Ukrainians.

So, the state has to change the economic paradigm and define key priorities for the country’s development. It is well-known that all rich countries became rich in the same way – they renounced raw products and shifted to the production of goods with a higher degree of processing.

The article was published at the site Дело.UA