Technological innovations: Under what conditions could Ukraine develop its economy?

Author : Bohdan Danylyshyn

Source : 112 Ukraine

Why is Ukraine's economy stuck at low incomes? Officials call dozens of reasons, most of them to some extent unfounded. But I think that a very important problem is that our institutions are of little use for the introduction of new technologies and innovations
19:48, 28 May 2019

Open source

We have heard a lot about the need to ensure the innovative development of Ukraine. Officials even tried to introduce fashionable terms, hoping that this will somehow contribute to innovation.

However, it should be understood that one of the main issues of modern theories of economic growth and current discourse on economic development is the recognition of the role played by institutions and politics in general.

Politics that encourage competition and remove obstacles, barriers and hindrances to doing business should help the growth of poor economies that can use the knowledge accumulated by other, richer countries (modern science is not like the one that was in the first half of the 20th century, it is more open).

Ukraine, as the poorest country in Europe at the moment (no matter how bitter it is to admit it), can and should use this knowledge and experience. Taking into account the quality of institutions and the level of competition is also important because it provides an opportunity to distract from excessive concentration on the usual factors for the Ukrainian economic discourse: the volume of foreign investments, the budget deficit, the level of the discount rate, etc.

These factors are very important, but we have almost completely ousted from economic discussions an assessment of the quality of the institutional environment and the peculiarities of the mentality of the Ukrainians, who are economic actors.

So far, Ukraine has not been able to escape from the "poverty trap" and is in that state of equilibrium that the vast majority of citizens are not satisfied with. What is easy to see looking at the results of presidential elections.

Why is Ukraine's economy stuck at low incomes? Officials call dozens of reasons, most of them to some extent unfounded. But I think that a very important problem is that our institutions are of little use for the introduction of new technologies and innovations.

Since technical and technological progress is the main mechanism for improving the efficiency of the economy, the suitability of institutions for the perception of new ideas is extremely important.

Let me explain what I mean by the term "institutions". The Nobel Prize winner in economics, Douglass North, in his works convincingly showed that people are limitedly rational and therefore will strive to create institutions (norms, values, rules of behavior in economics) that make it easier for them to make relevant decisions and make these decisions more predictable and less uncertain. According to North's institutional theory, the technological development of the country depends on the quality of institutions.

Of course, institutional reforms in Ukraine would contribute to the development of technologies, thanks to which for example, the "Asian tigers" made an economic breakthrough. But it is important to understand that the institutions existing in our country arose not without a reason, they were not imposed by an evil spirit and external enemies.

These institutions traditionally provide a certain balance that can be as stable as undesirable. Judging by the changes that President Zelensky is going to implement, the balance that has developed over 28 years of independence has ceased to suit the majority of Ukrainians.

After all, poverty and underdevelopment can strengthen the ability to survive of corrupt institutions and management structures. This is a direct road to the preservation of the poverty of the majority of citizens and to the conservation of the technological backwardness of the country. Indeed, one of the types of such institutions is those that protect the status quo from potential innovators.

Under what conditions will Ukrainian society become technologically creative and friendly to innovation?

Related: Verkhovna Rada served certain people, not Ukraine, - ex-president Kravchuk on air of Pulse TV show

The first condition: we need inventive and enterprising innovators who can challenge for the sake of a better life. Any innovation is unlikely to develop in an overly traditional society. Therefore, you need to create an atmosphere of respect for innovative entrepreneurs; you need to promote their success.

The second condition: innovation requires tolerance. In any society there are forces that protect the status quo. Even if it is stability at the level of the poorest country in Europe. One part of these forces acts on the basis of personal material considerations, defending their own vital economic interests, while the other part professes the principle “do not rock the boat.” It is necessary to ensure that these sectors of society show tolerance towards those who are willing to take an entrepreneurial risk.

The third condition: economic and social institutions should encourage potential innovators, creating appropriate incentives for them. We are talking about economic incentives (technological creativity is more likely if an innovator has the opportunity to get rich, and in his own country).

The fourth condition. To create and implement a new technology, an entrepreneur must interact with others: suppliers, customers, competitors, government officials. Therefore, the new leaders of Ukraine, wanting radical changes, should make sure that technological innovators have the most comfortable mode of interaction with the authorities. And also to ensure that innovative entrepreneurs comply with the laws in their relations with suppliers and customers.

The fifth condition. Sociologists have long understood that if the behavior of some economic agents depends on the actions of other agents, then models based on the principle of critical mass bring success. Three to five successful innovators may not be enough to start re-industrialization in Ukraine and the inclusion of our country in the fourth industrial revolution.

But if there are three to five dozen of them, then the influence of mutual imitation and learning may be enough to launch truly large-scale processes. Then we will have a chance to become Japanese in technology, which the president called for in his inaugural speech.

Visiting Western Europe, I wonder: what is the basis for stable qualitative development there? A big role is played by the institutions - the traditions of hard work, moderation in consumption, thrift, care for the offspring. They are passed on from generation to generation and provide one of the bases of economic growth.

But other institutions also play an important role in successful countries. I am referring to such formal and informal institutions as a degree of trust in the state, business security and the rule of law, a reliable system of control over the execution of economic and civil contracts, as well as the attitude of the power elite to individual initiative and innovation.

I understand that in five years such problems cannot be solved, but you can try the most difficult and most important part of the journey during this time. Whether the new president’s team is able to start successfully solving these problems depends on whether Ukraine will move on to development in a high-tech type or continue to trade the grain and rape, slabs and iron ore.

So the dynamics of the welfare of citizens depends on this. The attitude to the president in five years depends on this, when the term of his first cadence comes to an end, and, who knows, he may change his attitude regarding the second presidential term. I think that if the people of Ukraine see that the country is making a technological and economic breakthrough, then a sincere request for the second presidency of the president will go directly from the people.

Related: Kyiv Investment Forum key topic is innovations

Related: EU to assign € 17 mln for science and innovations in Ukraine

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