Jari Kaivo-oja:
Massive Ukrainian-Russian war and damage done
On February 24, 2022, the Russian Federation started to invade Ukraine, resulting in civilian casualties, displacement of millions of people, and widespread and significant destruction to homes, infrastructures, businesses, social institutions, families, and prosperous productive, and economic activity. The impact of the Russian invasion will be felt for future generations, with families displaced and separated, disruptions to human development, destruction of intrinsic cultural heritage, and reversal of a positive economic and poverty trajectory. (see The World Bank, Government of Ukraine, European Commission 2022).
Today we know after some calculation, as of June 1, 2022, direct damage had reached over US$97 billion, with housing, transport, commerce, and industry are the most affected sectors. Damage is mostly concentrated in the frontline oblasts (estimate is 74 percent), particularly Donetska, Luhanska, Kharkivska, and Zaporizka, and in oblasts that were brought back under government control (22 percent) such as Kyivska and Chernihivska. Most of the damage caused by the war is in the east of the country. (The World Bank, Government of Ukraine, European Commission 2022).
Disruptions to economic flows and production, as well as additional expenses associated with the war, are collectively measured as losses and amount to some US$252 billion. Ukraine’s Gross Domestic Product (GDP) shrank by 15.1 percent year over year in the first quarter of 2022, and poverty is expected to increase from 2 to 21 percent (based on the poverty line of US$5.5 per person per day). (The World Bank, Government of Ukraine, European Commission 2022).
Economic development before the Ukrainian-Russian war
In Figure 1, I report the GDP development phases of Ukraine in the years 1990–2021. We can see in it the effects of cyclical fluctuations for the 1990s and the financial crisis of the 2000s, but clearly the negative impact on economic growth after the invasion of Crimea, as the risks of the country’s future economic development increased.
Noteworthy for this figure is the fact that in 1990 the country’s economic growth was at the highest level for the entire long period, which reflects the destabilization of the operating environment of the national economy of Ukraine already in the longer term. In 2021 GDP in Ukraine was 535,6 billion international USD in constant 2017. For example, Finland’s GDP estimate in 2022 was $321.2 billion.
Figure 1. GDP, PPP (constant 2017 international $) in Ukraine, years 1990-2021. Source: World Bank Data 2023, 12.3.2023). In Figure 2 we report also the Gross National income of Ukraine, in 1989-2021.
Gross national income (GNI) is defined as a gross domestic product, plus net receipts from abroad of compensation of employees, property income, and net taxes less subsidies on production. This figure shows more clearly the strong economic fluctuations in the development of the Ukrainian economy. There has been instability and this has not eased the situation of the country’s citizens. If we judge the development of Ukraine on the basis of this indicator, we can see that the country’s development has been on an upward trend since 2000, although the negative impact of the invasion of Crimea can be seen here too, if we judge the development of Ukraine on the basis of GNI indicator.
Figure 2. Gross National Income in Ukraine in years 1989–2021. Source: World Bank 2023. Source: World Bank Data 2023, 12.3.2023).
Growing economic and human costs of the war
In a joint assessment released in August 2022, the Government of Ukraine, the European Commission, and the World Bank, in cooperation with partners, estimate that the current cost of reconstruction and recovery in Ukraine amounts to $349 billion (€349 Billion), which is more than 1.6 times the GDP of Ukraine in 2021. This means that the entire Ukrainian people will have to work for 1.6 years to repair the damage caused by the Russian invasion. However, this figure is expected to grow in the coming painful months as the war continues. We are certainly soon close to the value of two years of GDP. This situation poses a major economic resilience challenge to the national economy of Ukraine.
The Rapid Damage and Needs Assessment (RDNA) report (The World Bank, Government of Ukraine, European Commission (2022) lays out the financing needs for a resilient, inclusive, and sustainable recovery and reconstruction and provides a roadmap for planning. Over the next 36 months the RDNA assesses that $105 billion is needed to address urgent needs such as restoring education and health systems and infrastructure, preparing for the upcoming winter through the restoration of heating and energy to homes, support to agriculture, and repair of vital transport routes.
GDP per capita and unemployment in Ukraine before the war
We can assume that the GDP per capita level in Ukraine has dropped considerably with the war. The resources of the citizens are very scarce when it comes to going to repair again in a country ravaged by war. Figure 3 shows the country’s GDP per capita development as background information. Of course, it would be important to get close to the initial GDP per capita level of the war in the country during the repair phase, so that able-bodied people are strongly motivated to build the country and the national economy. It would be desirable to reach the level of $ 12000-14000 GDP per capita level quickly and improve it progressively as fast as possible.
Figure 3. GDP per capita, PPP (constant 2017 international $) in Ukraine, years 1990–2021. Source: World Bank Data 2023, 12.3.2023).
If we look at the development of the unemployment rate in Ukraine, the best situation in recent years historically has been in 2007 and 2008, when the unemployment rate was close to 6%. If we look at the development of the unemployment rate in Ukraine, the best situation in recent years historically has been in 2007 and 2008, when the unemployment rate was close to 6%. The potential for the future development of the Ukrainian economy is high since the population is well-educated and capable.
Figure 4. Unemployment, total (% of total labor force) (national estimate) in Ukraine, years 1995–2021. Source: World Bank Data 2023, 12.3.2023).
In 2021, the unemployment rate was around 10 percent. Of course, for the success of the recovery, it would be desirable to bring the unemployment rate to the lowest possible level, so that all possible resources of the nation are at the disposal of reconstruction. Based on the economic history of Ukraine, it can be argued that under favorable socio-economic conditions, it is possible to achieve an unemployment rate of even less than 6%. The critical prerequisite, of course, is the achievement of peace and the return to work of the fled migrant population.
Back to work after the war?
Key questions According to official UNHCR statistics, the total number of refugees from Ukraine recorded across Europe, are now about 8 108 448 (Situation 07 Mar 2023, Situation Ukraine Refugee Situation (unhcr.org)). There have been 19,293,161 border crossings from Ukraine and 10,823,841 border crossings back to Ukraine since 28 February 2022.
Figure 5. Population of Ukraine, years 1960–2021. Source: World Bank Data 2023, 12.3.2023). The population in Ukraine in 2021 is about 43 792 855 (UNHCR 2023).
A robust estimate is that percent of Ukraine people who are refugees is about 18,5%. The war in Ukraine has led to a serious humanitarian crisis and has caused the largest refugee situation in Europe since the Second World War. One challenging question for Ukraine’s economic recovery is how the workers returning to the country will be located in the future? How many people go back to Ukraine? Where do they return? What kind of jobs do they find employment in? How to get schoolchildren and students into education and studies? Whether they enter the urban labour market or the countryside labour market? There are many hard human recovery questions in the air.
The logistical issues related to the recovery plans are of a major nature. There are jobs in rural areas that serve food production, which is a very important source of export income for Ukraine. For economic recovery, it would be necessary to have enough manpower for agricultural product exports to pull the economy upwards. The same challenge applies to the tourism, hospitality, and experience cluster, which had begun to develop well in Ukraine before the war. The food production index shown in Figure 6, clearly shows how strategically important a sector of food production is for the national economy of Ukraine.
Figure 6. Food production index (2014–2016 = 100) in Ukraine, years 1992-2021. Source: World Bank Data 2023, 12.3.2023).
The agricultural sector is also a major employer in Ukraine. Figure 7 reports urban and rural population trends in Ukraine. We can see that rural areas have fewer and fewer populations which can be a challenging issue for future agricultural production.
Figure 7. Urban and rural population in Ukraine, years 1960–2021. Source: World Bank Data 2023, 12.3.2023).
In connection with the recovery plans in Ukraine, it is important to consider how the active workforce will be employed in different industries and services. Some of the most important industrial sectors in Ukraine include energy sector, metallurgical industry, chemical industry (titanium dioxide cluster), agriculture (grains, sunflower oil, and sugar), and ITC sector. Ukraine has a growing IT sector, with several tech companies and startups emerging in recent years. Ukraine has become an increasingly popular destination for outsourcing IT services.
The demographic structure is also an important background factor in this context. The figure shows the development of the working-age population (15–64 years) in Ukraine. in 1960–2021.
Figure 8. Population ages 15-64 (% of total population) in Ukraine, years 1960–2021. Source: World Bank Data 2023, 12.3.2023).
Paying attention to trust and public governance
When planning the economic reconstruction of Ukraine, it is important to invest in the management of public finances and fiscal budgeting. Figure 9 shows the development of tax revenues in Ukraine. It reflects the fact that the development of tax revenues has been on the rise and the country’s financial planning has been developing in a positive direction.
Figure 9. Taxes on income, profits and capital gains (current LCU) in Ukraine, years 1999–2021. Source: World Bank Data 2023, 12.3.2023).
The central government debt will be a challenging question in Ukraine in the coming years. In Figure 9 we figure out central government debt development in Ukraine from 2008 to 2021. We can forecast that the debt rate will increase in the coming years. The National Recovery Plan estimated that both EU partner grants and private investment grants will be needed in the future.
Figure 10. Central government debt, total (% of GDP) in Ukraine, years 2008–2021. Source: World Bank Data 2023, 12.3.2023).
In the future, Ukrainian decision-makers will have to pay attention to their administrative governance structures, because the World Governance indicator analyses published by the World Bank indicate that there is still much room for improvement in this important area, as the WG indicators are in the red, in negative numbers. Factors related to trust are not trivial when decision-makers are seriously planning to rebuild the country.
Figure 11 summarizes the development of the five key governance indicators from 1996 to 2021.
Figure 11. Worldwide Governance Indicators, Ukraine, years 1996–2021. Source: World Bank (2023) Worldwide Governance Indicators Database.
Thus, the World Governance indicator analyses indicate that much is needed when Ukraine is more closely aligned with European Union standards of governance in relation to corruption, effectiveness, political stability, regulatory quality, and rule of law. There are already ongoing efforts by the Government of Ukraine to lead the country toward recovery and reconstruction. In July 2022, Ukraine presented a US$750 billion Recovery Plan. Under the Ukraine Recovery Vision, US$150–250 billion is envisaged for restoration and modernization of housing and infrastructure.
A three-stage reconstruction plan was presented: Stage 1 is a plan blueprint; Stage 2 is a plan drill-down and roadmap; and Stage 3 is implementation. The Recovery Plan has set targets for 2032 and (1) it aims to accelerate sustainable economic growth with a plan for 7 percent annual GDP growth and an increase in investments, (2) to reach the top-25 economies in the Economic Complexity Index and the World Bank Human Capital Index; (3) and to achieve a 65 percent reduction in CO2 emissions from 1990. In general terms, Ukraine aims to develop itself towards European standards before 2032 and be a member of the European Union.
The size of alternative recovery plans for Ukraine?
In Figure 12, I have figured out current alternative recovery plans, lower and higher estimates for Ukraine, for the years 2022–2032.
Figure 12. Partner grants, Partner debt, and private investments. Alternative Recovery Plans, Lower and Higher Estimates, Ukraine, years 2022–2032. Source: Ukraine’s National Recovery Plan. National Recovery Council, p. 12).
In Figure 13 I have figured out our two estimates of the Recovery Plans of Ukraine, for years 2022–2032. The lower estimate is over 600 billion USD and the higher estimate is over 800 billion USD.
Figure 13. Alternative Recovery Plans, Lower and Higher Estimates, Ukraine, years 2022–2032. Source: Ukraine’s National Recovery Plan. National Recovery Council 2022, p. 12).
These economic and social recovery plans for Ukraine indicate that the size of the final price tag is not yet entirely clear. In any case, the scale of the stimulus package is large and will require a lot of planning and big political decisions. It is clear that the continuation of the war will inevitably lead to an increase in the resources needed for recovery. It makes the planning and implementation of the recovery a challenging planning problem, which inevitably involves a lot of uncertainties and risks. One critical factor will be the resources and personnel needs of the Ukrainian military in the future. It is obvious that, after the war, the state of readiness of the armed forces will have to be maintained for security reasons. In practice, this should mean that the resources of army personnel must also be used to rebuild the country.
How the economic recovery of Ukrainian-Russian war should be planned?
My Question to Open AI, New chat (openai.com)
“The economic recovery of the Ukrainian-Russian war will require a comprehensive plan that addresses both the short-term and long-term needs of the country. Here are some key steps that could be taken:
Stabilize the economy: The first priority will be to stabilize the economy by addressing immediate issues such as inflation, currency fluctuations, and capital flight. This may require the assistance of international financial institutions, such as the International Monetary Fund (IMF).
Rebuild infrastructure: The war has left many parts of the country in ruins, and significant investment will be needed to rebuild infrastructure such as roads, bridges, and buildings. This will provide employment opportunities and help to kickstart economic growth.
Diversify the economy: Ukraine has traditionally relied heavily on exports of raw materials such as coal, steel, and agricultural products. To ensure long-term economic sustainability, the country will need to diversify its economy by developing new industries, such as technology and services.
Encourage foreign investment: Ukraine has a large, well-educated workforce and significant potential for growth, making it an attractive destination for foreign investment. The government should work to create a favorable investment climate by reducing bureaucracy, addressing corruption, and offering tax incentives to foreign investors.
Focus on innovation: Ukraine has a strong tradition of scientific research, and the government should work to support innovation in sectors such as biotechnology, renewable energy, and advanced manufacturing.
Invest in education: To support a knowledge-based economy, Ukraine will need to invest in education and skills training. This will help to ensure that the country has a well-educated workforce that can compete in the global marketplace.
Address social issues: The war has had a profound impact on the social fabric of the country, with many people experiencing displacement, trauma, and loss. The government will need to address these issues by providing social services, mental health support, and opportunities for reconciliation and healing.
Overall, the economic recovery of Ukraine from the war will require a sustained effort from both the government and the private sector. It will also require the support of the international community, including financial assistance and technical expertise.”
I would estimate that these guidelines produced by artificial intelligence are relevant.
Jari Kaivo-oja
Research Director, PhD, Finland Futures Research Centre, Turku School of Economics, University of Turku;
Adjunct Professor (University of Helsinki, University of Lapland, and University of Vaasa);
Professor (Social Sciences, Kazimiero Simonavičiaus University, Vilnius, Lithuania)
References
National Recovery Council (2022) Ukraine’s National Recovery Plan. July 2022.
Open AI: ChatGPT March 13, 2023, New chat (openai.com)
UNHCR (2023) Situation Ukraine Refugee Situation (unhcr.org)
World Bank, Government of Ukraine, European Commission (2022) Ukraine Rapid Damage and Needs Assessment Report. August 2022.
World Bank (2023) DataBank | The World Bank.
World Bank (2023) Worldwide Governance Indicators | DataBank (worldbank.org)
Photo: Destruction in Ukraine, Unsplash.com
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