Not bad, but could be better

10 July 2018, 12:31

Despite the steady stream of negative talk about the state of the domestic economy—which appears to be mainly driven by the approach of the next round of elections—, its recovery is steadily picking up pace. Over QI’18, GDP rose 3.1% compared to the same period in 2017—one of the best indicators in the last seven years. Indeed, since 2011, Ukraine’s economy grew more quickly only in the last quarters of 2013, at 3.3%, and 2016 at 4.6%, in both cases driven by exceptional harvests. For the first half-year, which is less dependent on crop results, there has not been a better pace of growth in these seven years.

On one hand, this pace of growth is hardly enough to pull a country as poor as Ukraine today out of its slump. To achieve a breakthrough from the third world to the first in a short timeframe and become a developed country, Ukraine needs to post double-digit growth for a solid period. Yet, how much can be expected when neither those in power nor their key opponents are aware of, let alone understand, the need for cardinal changes in their policy priorities that then need to be subordinated to the goal of economic growth. Both groups are focused on a policy of accumulation, on the many ways to redistribute the national pie, from social populism to anti-corruption activities, and not on increasing that pie. Given this, it’s hard to imagine how Ukraine might reach a breakthrough pace of economic growth.

On the other, it’s simply dangerous manipulation to constantly berate the current administration and moan that, because of the Revolution of Dignity, “professional managers” have been sidelined from government and “traditional economic ties” with Russia have been ruptured, that the country’s economy has suffered “a terrible collapse that has reduced it to barely half of what it was, and that climbing out of this pit at the current pace will take at least 15-20 years.” The argument then goes that Ukraine should backtrack, reject painful reforms and the move towards an unpredictable future. This kind of thinking exploits outdated stereotypes that many Ukrainians still believe in, pushing them into despondency and fostering distorted notions about the path to renewal and growth.

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Eliminating distortions

First, all these statements about the “unprecedented economic collapse” of the last few years is a myth underpinning political agendas aimed at the masses and statistical manipulations aimed at specialists. Politically, comparative figures of Ukraine’s GDP presented in dollar terms, making 2016 really look barely 50% as 2013, and 2017 barely 66%. But the fact is that the nearly twice-larger GDP of 2013 also included the now-occupied territories of Crimea, Sevastopol and parts of Donetsk and Luhansk Oblasts that once produced most of the regional output.

Secondly, dollar-based GDP shrank in many countries of the world after 2013 as the US currency sharply strengthened in relation to most other currencies and most internationally traded goods. As a result, even countries whose economies had been growing steadily in the previous few years saw their real GDP go down in dollar terms. For instance, Poland’s real GDP over 2013-2016 grew 10%, but its dollar value fell 10%. Over that same period, Germany’s real GDP growth comes out as a decline of 7.5% when calculated in dollars. France, too, posted a 12% decline in dollar terms, but its real GDP grew 3.2%.

Among Ukraine’s post-soviet neighbors, the effect of the exchange rate on GDP growth was even stronger—and not that different from Ukraine’s. For instance, the Russian Federation posted a 2% decline in real GDP over 2013-2016, but in dollar terms, it was down 42% in 2016, compared to 2013. Similarly, Belarus’s GDP went down 4%, but in dollar terms it was down nearly ten times more—37%. Considering that Ukraine lost part of its territory over this period, its performance was not very different from either of these neighbors. In short, representing economic growth in the US dollar or any other currency is an indicator that can sometimes sharply rise or fall without reflecting objective economic changes.

Using real GDP for this calculation, Ukraine’s economy was only 11.5% smaller in 2017 from pre-war 2013. This indicator alone testifies that the supposed economic abyss into which the country fell in the aftermath of Russia’s invasions and war was actually not that deep. By comparison, during the world economic crisis of 2009, the domestic economy shrank 14.8% and by 2013, four years of recovery later, real GDP was still 6.4% below 2008.

Indeed, the situation is even better when examined across different regions. Now we see that by 2016, 10 oblasts and Kyiv were only 1-5% below 2013 levels, while another five were at about the same level or significantly higher—Vinnytsia, Zhytomyr and Volyn. Moreover, growth continued through 2017, although exact numbers are not yet available. The overall “loss” for this period, 13.7% of GDP compared to 2013, is a reflection of the largely artificial decline in indicators for Donetsk and Luhansk Oblasts: -59.2% and -65.7%. This was because Derzhstat, the statistics office, continued to include in its baseline all of Donetsk and Luhansk Oblasts, which were not under government control in 2016, 2017 or 2018—despite its official claims that they were not including temporarily occupied Crimea, Sevastopol and ORDiLO. The picture of an enormous economic collapse painted as a result of this, which in reality took place in the territories that were occupied, but not in the rest of those two oblasts, was the main cause of the 13.7% “adjustment” in 2016 compared to 2013.

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Comparing times and neighbors

Since the country is not in a catastrophic state of collapse compared to prewar indicators, it means that the corollary myth to that is that it will take decades for the country to get back to those levels. Across the free territory of Ukraine, real GDP could be back up at 2013 levels and even a little higher by 2019 if the country can maintain the current modest pace of growth of 2.5-3.0%. Indeed, there’s a good chance that Ukraine could be back at 2013 levels even in euro terms by next year, if not entirely in dollar terms, provided that the necessary adjustment is made for the temporarily occupied territories. Neither the supposed sidelining of “professionals” from power nor the largely mythical “disruption of traditional economic ties” with Russia stood, stand nor will stand in the way of this.

Economic stagnation began long before the Revolution of Dignity and Russian aggression. It happened under the previous Administration. By 2012, GDP growth was a marginal 0.3% and in 2013 it was completely flat. In fact, the economic decline of 2014-2015 was the result of the negative actions of the Yanukovych regime, which for several years had been winding it up like a spring. What’s more, lately the domestic economy has been posting higher growth than its post-soviet Eurasian neighbors—even without any policy of stimulation.

For instance, Russia’s pace of growth has been well below that of Ukraine for the third year running: in 2016, it contracted to only. 0.2% growth, when Ukraine was posting 2.4% growth; in 2017, Russia rose to only 1.5% while Ukraine inched up to 2.5%; in Q1’18, Russia’s economy only grew 1.1% while Ukraine zipped ahead at 3.1%. Belarus, meanwhile, despite enjoying no “disruption of traditional economic ties,” plus cheap gas and oil from the RF, began to recover only in 2017, not in 2016 like Ukraine, and continues to do more poorly for the third year running. For instance, where Ukraine’s GDP grew 2.4% in 2016, Belarus’s contracted by 2.5%, while in 2017, it grew 2.4% vs. Ukraine’s 2.5%.

Now for the details

When sectoral analysis is applied to GDP, it becomes apparent that the least reformed sectors of the economy are also the ones that are performing the most poorly. For instance, overall GDP grew nearly 5% over 2016–2017, with the main drivers being construction at +46.1% and closely related real estate at 10.2%, and the IT sphere, which grew 14.7%. Other sectors that have been growing faster than the economy as a whole include retail trade at 9.5%, processing industries at 9.0%, the hotel and restaurant business at 8.0%, and postal and shipping services at 7.5%. Meanwhile, delays in reforms have led to declines in sectors like healthcare at -3.6%, education at -4.7%, energy at -5.1%, and waste management, water supply and sewage at -21.8%.

But the problems and the task of resolving them are not to return to 2013 levels or even those of 2008 or even 1991. It’s not to replace today’s pace by yesterday’s or to return to partly lost traditional markets for outdated Ukrainian products. What’s vitally important is to stop the downward spiral, where every economic boom and bust cycle ends up with the country’s economy in worse and worse shape. Ukraine is currently at an extremely low level for it to consider little more than recovering to 2008 or 2013 levels, or even a modest improvement over them.

For the country to rise from the bottom, it needs a cardinal shift in its policy priorities. It needs to stop feeding off the nation’s ever-shrinking natural wealth and to stop eternally searching for something else to redistribute. Ukraine needs to aim, instead, for growing the national wealth and establishing such principles for sharing it that will force everyone to participate as actively as possible in multiplying it.

Translated by Lidia Wolanskyj

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