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How to replace Ukraine's commodities exports with technology intensity?

Author : Oleksandr Danyliuk

Source : 112 Ukraine

or many years, both exports and imports account for about 50% of GDP. Indicators of foreign economic activity for the economy of our country are very significant
15:51, 28 August 2019

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Ukraine is a country with a raw export-oriented economy. For many years, both exports and imports account for about 50% of GDP. Indicators of foreign economic activity for the economy of our country are very significant.

Current quantitative macro trends are negative. In the first half of 2019, exports of goods and services grew by 5.2% compared to the first half of last year, while imports grew by 8.5%. The trade deficit in the first half of 2019 amounted to $ 1.6 billion, which is 1.7 times more than in the first half of last year.

The deficit in foreign trade in goods amounted to $ 3.7 billion: an increase of 1.4 times compared to the first half of 2018.

Related: Ukraine gets permission to export dairy products to Japan

The structure of exports from Ukraine is of low quality. In particular, the export of raw materials and semi-finished products (these include the commodity groups "products of animal origin", "products of crop production", "fats and oils", "mineral products", "products of the chemical industry", “leather”, "wood and wood products her ", "cellulose", "materials from base stones, gypsum, cement", "metallurgical products”)) amounted to $ 18.7 billion for the first half of 2019.

This represents more than three-quarters of Ukrainian exports - 76.4%. Over the past 15 years, commodity exports have been below 70% of total exports only in 2009, 2010, and 2017.

Commodity exports accounted for in the structure of exports: in 2004 - 70.8%, in 2005 - 75.7%, in 2006 – 74%, in 2007 - 71.5%, in 2008 - 74.7%, in 2009 - 69.2%, in 2010 - 63.9%, in 2011 - 73.1%, in 2012 - 70.2%, in 2013 - 71.6%, in 2014 - 74.9%, in 2015 - 75, 1%5, in 2016 - 74.6%, in 2017 - 66.9%, in 2018 - 72.3%.

Related: Limit of oil export from Russia not to influence Ukraine’s market critically

Most of all, imports grew in “precious or semiprecious stones” subgroup (by 51.5%), “cereals” (by 42.3), “mineral products” (by 18%), “animal products” (by 15.2%).

Fall in exports for such a group of technological products as "machinery and electrical equipment" amounted to 8.8%, including a 10.1% decline in exports of boilers and nuclear reactors, and 8.1% for exports of electric machines.

The decline in exports of ferrous metallurgy products amounted to 11.1%. Apparently, the reason is the deterioration in the pricing environment of world markets for steel and iron ore. Forecasts do not promise positive changes for our metallurgical enterprises in the second half of the year either.

Ukraine is moving from the status of an exporter of metallurgical and chemical products to the status of an exporter of agricultural and mineral raw materials (export of finished food products grew by 10.2%, but its share in the total export structure was 6.6%) and metallurgical semi-finished products.

Related: Russia bans export of petroleum, petroleum products to Ukraine

Both statuses are not prestigious; we just change our specialization, remaining in the lower league of world exporters.

However, there are encouraging trends. Exports of land vehicles, aircraft, and boats increased by 40.8%. However, their share in total exports amounted to only 1.7%. The export of optical instruments and cameras increased by 20.3%. But their share in the export volume is negligible - 0.3%.

The volume of pharmaceutical exports increased by 19.4%, part of which relates to goods with high added value.

The export of textile products increased by 2.5%. Few people know that leading world brands sew clothes in Ukraine - Zara, Dolce & Gabbana, Hugo Boss, Prada, Benetton, Marks & Spencer, Triumph, Max Mara, Laura Ashley, Hennes & Mauritz, and others. Domestic garment factories have become in certain mini offshore degrees for global brands.

Compared to the European countries, we have cheaper labor force; Ukrainian production capacities are much closer than Asian ones, which allows us to reduce transportation costs. The quality of the export-oriented tailoring is high. There is potential for further export growth.

There are several import-related numbers that deserve attention. In the first half of 2019, the import of mineral fertilizers increased by 47.1% in the first half of 2019. The battles surrounding the restrictions on import of foreign fertilizers have been going on for many years, but the practice is not in favor of the domestic producer, which is losing the domestic market at a rate higher than the loss of foreign markets.

Related: Ukraine loses status of third world exporter of honey

This can be perfectly seen on the example of the development of car assembly production in Slovakia and the Czech Republic. Unfortunately, Ukraine is a vivid negative example in this case. In 2018, we produced 6.6 thousand cars, of which 5.7 thousand cars (almost all of them were produced at the Eurocar plant), which is 25% less than in 2017. And in Slovakia in 2018, more than 1 million cars were produced.

Nobel Prize winner in economics Michael Spence wrote: “The word openness has two meanings. It can mean that something is unlimited, accessible, and possibly vulnerable. Or it can mean that a certain object is transparent and not secret.”

In the first sense, this word is often used in international trade, investment, and technology. Such openness has always led to structural changes in the economy. Structural changes can be both positive and destructive. So far, the openness of the Ukrainian economy does not lead to positive changes in its structure, which is clearly seen from the analysis of exports and imports.

Of course, I do not call for starting to close ourselves from the world. By the way, this is unrealistic. A different approach is needed: there are examples in history when states diversified the structure of exports, increasing the share of technological exports, for a relatively short period of 7-10 years (Vietnam, Slovakia, and the Czech Republic).

Foreign investors played a major role in this. Their goal was to include local companies in global value chains in order to serve foreign markets and fill domestic markets dominated by imports.

In order for Ukrainian enterprises to become intermediate, and in ideal cases, finite degrees in global value chains, political stability, and rigorous rule of law, the creation of a high-quality logistics infrastructure and effective tariff and customs regulation are necessary.

I think that the new parliament and government need to focus on these issues. Then, by the end of their cadence, we will be able to see trends in the growth of high-tech exports and a decrease in imports of products that we can very well produce.

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