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After crisis: How long will Ukrainian economy survive without reforms?

Author : Oleksiy Kushch

We still have about five years to carry out the necessary structural reforms, demonopolize the economy, raise the level of small and medium-sized businesses, services, create growth points in sectors with high added value and to attract the necessary foreign investments in these sectors
23:11, 23 January 2018

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Ukraine fulfilled its quota for the export of honey to the EU ... Ukraine broke another record on labor migration to Poland ... Reading these reports, I recall the course of school history: "Normans took honey, wax, and slaves from the Slavic lands." It’s strange - in a thousand years to see this turn, almost like in the film "Back to the Future."

At the same time, various assumptions as to whether our economy has passed the "bifurcation point" were reasons for building all sorts of models and determining the timing of the Ukrainian economy's return to the 2013 level.

The first in recent years medium-term planning of macroeconomic indicators of Ukraine, undertaken by the Ministry of Finance in the form of "Fundamental Directions of the Budgetary Policy for 2018-2020", provided fertile soil for all kinds of estimates and assumptions.

Of course, the state bears the main responsibility for the employment of its citizens in the homeland. And with a decent salary. In addition, the endless corruption scandals in the upper echelons of power give rise to an ordinary Ukrainian desire to receive profit from his beloved country. It is only necessary to understand that such a model is doomed to gradual annihilation when the egoism of its participants is facing the impoverishment of the general reserves. The strength of corruption has already practically devoured the country from the inside.

All this could not negatively affect the internal economic and demographic processes.

We see the level of depopulation of Ukraine over the past 25 years: a reduction from 51.8 million to 42.5 million people, due to both internal factors (excess deaths over births, labor migration) and external (annexation of Crimea, the occupation of the east). At the moment we have a demographic gap.

Even more indicative is a dynamics of the economically active population of Ukraine of working age. Compared with 2010, the number of economically active population decreased by 1.86 million people, and the number of full-time employees - by 2.39 million! This gap is due to the fact that in 2014-2015 there was a loss of part of the territory of the south-east of the country, and there the percentage of staff employed in large enterprises was the highest. It is worth noting that it is the "staff" segment that is the basis that provides income to the budget and contributions to the Pension Fund. It's amazing, but in Ukraine, full-time employees make up only 45% of the economically active population of working age. The remaining 55% are either unemployed or self-employed, or have left abroad, or are not listed at all. In fact, this is the level of our shadow economy, and in simple words - the parasitic model of the functioning of productive forces.

Negative trends are also observed in the part of the economically inactive population: the proportion of pensioners increased from 48.9% to 52.8% as compared with 2010, while a portion of young people (pupils of schools, students) fell from 25.7% to 21, 4%.

In addition, starting in 2013, the Pandora's box of migration was actually opened: the number of new applications for a temporary stay in the EU countries (up to 12 months), filed by Ukrainians, increased from 236 thousand to 493, by approximately 200 thousand people per year. And this is an official data, voiced by the International Organization for Migration (IOM) in the annual report. In fact, to 200 thousand natural loss of population per year, it is necessary to add at least the same number of labor migrants. Obviously, in the conditions of visa-free travel, this process will only accelerate.

Related: Ukraine’s primary housing market prices increase by 4.7% in 2017


In the coming years, Ukraine will have to solve the most difficult task of increasing GDP in dollar equivalent and increase the domestic production of the economy, coupled with rising labor productivity. And this is in conditions of the outflow of the most active and skilled workforce. At the same time, regardless of how many economically active people are in Ukraine, there is a certain constant of government spending. After all, our retired people and school-age children are not needed in the EU. This means that permanent state subsidies are required for education, medicine and covering the deficit of the Pension Fund. In addition, defense. And the road infrastructure requires considerable resources. And let's not forget about the colossal man-made complex that we inherited from the times of the USSR: 15 nuclear reactors, dams of hydroelectric power stations, bridges, huge fixed assets.

As you can see, the state needs about 25-30 billion dollars only in order to maintain the current minimum level of consumption. And this is without a development budget. With such a constant and falling in the dollar equivalent of GDP, it is necessary to constantly increase the level of government spending in GDP and attract external loans, and therefore to monopolize the economy and oppress the private sector in order to maintain current livelihoods.

At the moment minimal spending of Ukraine leads to a critical reduction in its administrative functions, anarchy and a drop in the human capital index because safety, education, and medicine are the first to suffer. In Scandinavian countries implementing the model of "Swedish socialism", the level of state spending has always been extremely high - more than 50%. But for such high values are necessary: the low level of corruption; transparency in the allocation of budgetary funds; high efficiency of public administration; public confidence in the state. Otherwise, a high level of public spending will lead to the stolen public funds and reduce the competitiveness of the national economy, and, consequently, to a fall in GDP. Therefore, at first, with the growth of public spending, GDP also increases, then an optimal point of interdependence is reached (it is generally assumed that this is 30-40%), and in the future, as costs increase, GDP begins to decline.

According to the analysts of the Center for Economic Strategy, published in the article "The Optimal State's Share in the Economy: Theoretical Calculations for Ukrainian Reality," Ukraine currently has one of the lowest indicators regarding the efficiency of the state management and at the same time an extremely high level of public expenditure.

Now let’s talk about our main regional competitors. As we can see, the share of aggregate state expenditures of Ukraine in GDP (%) is the highest - more than 55%. In Singapore, by the way, it is 17.6%. Even in paternalistic countries, such as the Russian Federation and Belarus, this figure is at the level of the countries of central Europe - 37% and 45% respectively.

In order to ensure such a high level of public expenditure, our country has to maintain a very negative level of tax burden on business and the population. Needless to say, with such a level of public expenditure and taxation, regional competition for investments cannot be won, and the share of small and medium-sized businesses in the GDP structure cannot be increased.

In its time, post-war Japan, in order to overcome the post-war crisis in the period of 1945-1960, cut budget expenditures from 30% to 19% of GDP. And this is in the period of post-war devastation when people suffered from hunger and total lack of money. Russia recently during sanctions significantly reduced budget expenditures in relation to GDP (up to 20%) and plans to reduce it to 14%, keeping in mind the fate of the former USSR, which before its collapse distributed up to 70% of GDP through the budget. Poland, which we often like to mention in vain, distributes only 19% of GDP through budget mechanisms.

Ukraine needs to reduce the budgetary burden on the economy to at least 25%, first of all in order to become minimally attractive for foreign investors (and not in raw materials and logistics, but in industries with a high level of added value and services). Given that the constant of our spending items for the next ten years will be about $ 30 billion, to achieve this threshold of government spending, GDP should not fall below the $ 120 billion mark (in 2016, the dollar equivalent of GDP was less than $ 90 billion, 2017 - about 100 billion dollars).

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Achieving this will be extremely difficult, given the slow growth in the coming years and the planned level of inflation and devaluation of the national currency.

As we can see, most of the GDP growth in UAH will be "eaten up" by the devaluation of the national currency: in 2018, with a GDP growth of 3%, the devaluation will be 5%, that is, in dollars, we will see even minus. In 2019 - almost zero (4% GDP growth and 4% devaluation) and only in 2020, a small "plus" is possible. We note that this is based on the very optimistic forecasts of the Ministry of Finance on economic growth and pessimistic forecasts regarding the fate of the dollar in Ukraine. For example, for the most problematic period from 2019 to 2020 (based on the amount of repayment of external loans, some experts say even the probability of technical default), the Ministry of Finance of Ukraine forecast the devaluation of hryvnia from 30.5 to 31 UAH / per 1 USD. It is also unclear why this would accelerate our economy in 2020 to 4% growth, given that the low base of comparison, as in this year and the past, will no longer exist.

Proceeding from this, the maximum expected growth of the Ukrainian economy in dollar terms is permissible in the mark of 1% per year (on average over the forecasting period). In the same time interval, it is possible to reduce the population by 400,000 people a year, due to high mortality and labor migration.

As we can predict, by the middle of the century the population of Ukraine could be reduced to 30 million people, and GDP - up to 97 billion dollars. On the one hand, such a number may seem apocalyptic. But according to the UN Population Fund estimates, the population of such countries as Ukraine, Russia, Belarus, Bulgaria, Romania, by 2050 will be reduced by 15%, that is, for us, up to 35 million. A similar forecast was given by Ella Libanova, director of the Institute of Demography and Social Research. But 35 million is based on natural factors: fertility and mortality. And we still need to take into account the factor of labor migration in the EU, especially in the context of increasing integration with the common European economic space. What is at stake is not only permanent but also seasonal labor migration, since seasonal workers leaving the country for 6-9 months, practically do not participate in the creation of an internal gross product, although they make a feasible contribution to the level of domestic savings and the balance of payments.

We still have about five years to carry out the necessary structural reforms, demonopolize the economy, raise the level of small and medium-sized businesses, services, create growth points in sectors with high added value and to attract the necessary foreign investments in them. The chances for reforms will continue in the future, but only now we can implement them through the reintegration of our labor migrants. Otherwise, to accelerate economic growth (if, of course, it takes place), it will be necessary to attract migrants from third countries...

In all this forecast there is undoubtedly positive. In parallel with the de-industrialization of the economy, inevitable de-oligarchization will occur. The oligarchs and their monopoly companies will inevitably lose their "forage base". Of course - this is a very cruel way to deal with them because when you want to get rid of cockroaches, burn an entire apartment. But still, the natural decline in a large-scale industry will lead to an increase in private initiative and the decentralization of all government systems in the state. The greatest risk here is the threat of internal disintegration and social tension. But in this issue, Europe seems to have found the right recipe. These are loans in exchange for reducing the state's social obligations, absorbing the most active part of our population in the European labor market and the target market niche for the remaining in the country raw materials and agriculture. Plus services. Maybe tourism. The proximity of Ukraine to the borders of the European Union and the inability to shield ourselves from us by a new wall is a guarantee that our poverty, so to speak, is guaranteed. Well, at least with the western border we were lucky - as long as Poland needs our workforce, and there are no politicians like Trump who would want to build a "European Wall" on our western borders and at our expense...

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