Conclusions Ukraine should draw from Davos 2019

Author : Bohdan Danylyshyn

Source : 112 Ukraine

Ukraine, as one of the largest countries in Europe, needs to use its competitive advantage to make a capacious domestic market, which to a large extent should be filled with domestic products
20:37, 5 February 2019

112 Agency

It was planned that the main theme of the Davos forum will be globalization and the world architecture in the era of the fourth industrial revolution. In fact, the most attention at Davos-2019 was paid to the issue of British exit from the European Union and the consequences of it.

Members of the British delegation in Davos have been actively negotiating the confirmation of a trade regime with key partners. Foreign Trade Minister Liam Fox conducted talks with representatives of South Korea, Hong Kong, and Israel. On the eve of the Davos Forum, such negotiations took place with Australia, Canada and New Zealand.

According to the British minister, the parties agreed to sign trade agreements at a level “like in the EU or better” over the coming months. The UK expects to conclude them by the end of March 2019, when the “hard” Brexit mode should automatically turn on.

Regardless of the mode in which the UK exits the European Union, it will remain the largest trading partner of the EU and the main investment hub. And here is the question important: who will be more attractive for investments after Brexit - the UK or the EU?

After all, it is possible that despite the “transit” recession of 2019-2020, in the end the UK will benefit from its withdrawal from the EU. The UK Ministry of Economy on the eve of the Davos forum provided Deloitte and UNCTAD data on foreign direct investment in the world in 2019, according to which the UK economy increased its investment attraction by 20% in the “standby” mode of leaving the European Union, while in the EU there was a decline of 70%.

Yes, and the growth rate of UK GDP in recent years has been consistently higher than in the euro area, and more often higher than in the European Union as a whole.

Therefore, it is logical that the main topic of discussion at the World Economic Forum were events in the largest economies of the European Union that could be triggered by a tough Brexit: Germany, France, Italy, Spain, the Netherlands and Portugal. The consequences of Brexit for the EU are difficult to foresee.

But given that the EU's GDP growth in 2016-2018 was very uncertain, any strong political or economic action, if it coincides with Brexit, may scare investors.

Compared to many other EU members, the UK has several important advantages: a solid banking system and investment flows to London. Finally, capital inflows to the UK in 2015-2018 can also be explained by the mid-term “flight from risks” of the EU capital.

In this sense, UK can be considered as a European alternative to investment in the United States, and investments in its economy - as a guarantee of the preservation of the UK market after Brexit.

The second most important topic of discussion in Davos was the preparation for a possible slowdown in GDP growth or even recession in the European Union and its associated economies.

Although, until this year, the prospects for a slowdown in the global economy were mainly associated with China, the data for the fourth quarter of 2018 regarding the EU and the euro zone gave reason to expect a significant contribution from Europe to the general inhibition of economies.

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On December 21, the IMF lowered its estimates of global economic growth by 0.1–0.2 in 2019–2020 solely due to worsening expectations in the euro area.

All this makes us seriously wary of the strong connection of the Ukrainian economy with the economies of the European Union and the PRC (these are Ukraine’s key foreign trade partners). By the way, in China, where we ship millions of tons of agricultural products and iron ore, the lowest rates of economic growth over the past 30 years were recorded.

A quite possible development scenario is a decrease in demand for Ukrainian raw materials and semi-finished products. Do we have a plan "B" in this case? The export-raw model of the economy, the classic example of which, unfortunately, is Ukraine, a priori has high sensitivity to external shocks (whether it be commodity price fluctuations or problems in the economies of the main trading partners).

It is necessary to understand: agriculture and trade cannot be "queens", and industry cannot be their entourage. In addition to the reorientation of the economy of Ukraine on the path of innovation and technological development, there is another effective measure that will reduce the sensitivity to external shocks.

Which European countries easily survived the 2008 world economic crisis? Germany, Poland (in which there was no economic downturn at all) and France. What unites them? These are countries with a large population and a very capacious domestic market, which is quite saturated with domestic products.

Ukraine, as one of the largest countries in Europe, needs to use its competitive advantage to make a capacious domestic market, which to a large extent should also be filled with domestic products.

The formation of internal competition in our country and the creation of a capacious domestic consumer market are our key tasks (along with the transition to the innovative high-tech development model).

In the context of solving this problem, it is necessary to do maximum to create an effective mechanism for the development of small and medium-sized businesses, which services and products should form the domestic market, as well as to facilitate access to financial resources for small and medium-sized businesses.

This is important given the role that medium and small businesses play in developed economies. When such business will rise in Ukraine - a capacious domestic consumer market will appear, and the creation of new jobs will allow employees to spend their income in the domestic market.

How to make part of domestic demand directed to the purchase of domestic products? There are several options, one of which is credit programs with the obligatory condition of purchase of Ukrainian goods on credit provided. You can also take advantage of the experience of Turkey, where during public procurement a quota for the mandatory purchase of products of local small and medium businesses was established.

But Davos 2019 gave a specific symbolism: it is possible that Brexit could be a serious challenge to the EU economy, and this will adversely affect the economy of Ukraine linked with it. It could happen if we continue to hope for foreign trade in agricultural raw materials and metallurgical semi-finished products, as well as to fill the domestic market only with imported products.

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