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What should medium-term strategy of Ukraine's economic development look like?

Author : Bohdan Danylyshyn

The key task of the economic growth strategy should be to ensure the development of the national economy at a pace higher than the world average. An announced 5-7% annual increase in the real GDP of Ukraine is desirable
22:34, 19 February 2018

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112 Agency

Earlier I attended a meeting of the Ukrainian government, where I considered the "Report on the progress and results of the Program of the Cabinet of Ministers of Ukraine in 2017". The government has launched a number of reforms that, if properly coordinated and directed, can significantly change both the institutional form of the relationship between the state and business entities and form a new structural framework for economic development. On the whole, I positively assess efforts of the government to ensure the reform of economic relations in the country. The Cabinet of Ministers within the framework of the policy of economic growth has worked out a number of initiatives, the introduction of which will significantly accelerate the development of key sectors of the economy, primarily the industrial and agricultural sectors, as well as attract investment and innovation in the economy and citizens' lives.

However, in our opinion, the government should not forget that Ukraine has formed an economic model, which has three features: export orientation, a significant level of import dependence and relative underdevelopment of the domestic market.

But the ratio of exports of goods and services (as well as their imports) to GDP fluctuates around 50%.
At the same time, the indicator of net exports remains negative. So, if in 2016 it amounted to -5.5 billion dollars, then in 2017 – it was already - 6.8 billion dollars.

An important factor is the negative balance of foreign trade in goods, which increased in 2016-2017, from - 6.9 billion dollars to - 9.2 billion dollars.

So, as an obvious way to accelerate economic growth, short-term (2020-2025) incentive measures should be considered:

- restructuring of export activities;
- reduction of import dependence;
- development of the internal market.

Restructuring of export activities - a short-term aspect

Given the existing market advantages in the production of agricultural goods, the main focus should primarily be on increasing the production of high-tech goods, the cost of which in foreign markets can be five to six times higher than the cost of raw materials. This, for example, concerns the transition from the export of conventional grain to the export of lactose syrups produced from it, amino acids, gluten, bioplastics, vitamins. Similar opportunities exist for the export of high-tech whey produced from conventional milk.

Secondly, it is necessary to deepen our relations with the EU within the FTA, that is, to achieve a softening of the conditions for access of Ukrainian products from the internal market of Europe by increasing the current quotas and reducing the current tariff restrictions.

Thirdly, it is necessary to ensure the full implementation by Ukreximbank of its "core" functions regarding the support of domestic exporters with the simultaneous practical launch of the Export Credit Agency.

Reduction of import dependence - a short-term aspect

In 2017, commodity imports to Ukraine increased by $ 8.5 billion, of which almost half (3.9 billion) accounted for the increase in imports of mineral products (primarily oil and petroleum products, coal, anthracite, briquettes, etc.). This became an additional factor in increasing the energy dependence of the national economy. In the course of 9 months of 2017, the cost of imports of hard coal from the Russian Federation increased by 67.6% in the corresponding period of 2016, and by 20.9% in physical volumes. This requires an early geographic re-profiling of imported energy supplies while reducing the energy intensity of the national economy.

The development of the domestic market - a short-term aspect

Accelerated economic growth is impossible without first addressing the problems we have at customs, because of which "gray" and "black" imports suppress the production of analogs of goods.

Secondly, it is advisable to create a kind of development fund that would be formed from several sources of financing (budget, private, foreign, donor, etc.), aimed at developing modern production technologies and would be supervised by the supervisory board from respected Ukrainian and foreign participants.

Thirdly, the introduction of such a fund requires a clear definition of promising technologies, as well as mechanisms and instruments for their support: tax, fiscal, credit, foreign exchange, and others. Unfortunately, today such a list of technological priorities and the system of their targeted support in the country de facto does not exist.

However, in reality, there are other phenomena when the state accumulates funds during the year on its own treasury account in the National Bank, and then "releases" up to UAH 50 billion to the market within two to three weeks before the New Year holidays, as, for example, we saw in 2017.

As a result: hryvnia depreciates, inflation grows, the National Bank raises the discount rate, bank loans increase and it becomes incomprehensible how they can support economic growth if their value starts to reach 18-20% per annum (in national currency).

Investments

Modernization of the national economy is impossible without the receipt of foreign direct investment, which is directly related to the import of new technologies.

Both the state and national business should increase capital investment. The business should be a positive example in this respect, demonstrating effective cooperation in the form of a successful public-private partnership in implementing joint development projects.

Preservation of labor potential of the country

Without the implementation of these measures aimed at technological modernization of production, it will be impossible either to achieve accelerated growth of the national economy or to preserve its labor potential. After all, if during 2015-2017, 800 thousand of labor migrants left the country left and did not return, then in 2018-2019 another 500 thousand people can join them.


Not only the domestic experts but also the leading Western centers (in particular, the Atlantic Council) note the negative consequences of the loss of the most active, professionally trained and valuable workers. It should be noted that we are unlikely to be able to keep promising young people in the country on the existing raw materials base of domestic production. Moreover, the nearest neighbors are able to offer them more interesting working conditions.

Medium-term strategy of economic development based on technological modernization

In general, all these issues are interrelated. Therefore, they should be combined into a single strategy of economic development on new technological principles. The latter should be designed for a medium-term period, for example, 2019-2025. It is advisable to entrust it to the Cabinet of Ministers of Ukraine with the involvement of the National Bank of Ukraine, the National Academy of Sciences of Ukraine, as well as representatives of the expert environment.

Such a strategy of technological modernization should link the production of the real sector to the single complex, with the activities of specialized scientific institutions and applied production and research centers, which for today does not exist. The development of such a strategy should be initiated as early as 2018 so that by 2019 it would be possible not only to have agreed content but also to begin its practical implementation.

The key task of such an economic growth strategy should be to ensure the development of the national economy at a pace higher than the world average. The announced 5-7% annual increase in the real GDP of Ukraine is desirable.

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