Would Ukraine benefit from a Special Economic Zone centered on one of its cities, like China did adjacent to Hong Kong?
Creating a designated area and saying "export businesses and FDI especially welcome here" seems to help overcome both incumbent resistance to reforms (they can be isolated to a small area at first) and foreign investor nervousness (they can expect a critical mass of development-oriented services sooner if it's all happening in one area).
My understanding (admittedly weak) of Ukrainian politics in the past decade or two is that it had some similarities with Belgium - a geographic divide between a poor part that spoke the same language as their big neighbor, and a rich part that wanted greater global integration. Putting economic development tools primarily in the west of Ukraine seems like it could exacerbate these internal tensions, unless you encourage greater internal migration of Russian speakers from the east into the richer west.
The Western Ukraine is less industrialized and generates lower fraction of the countries GDP than the East. Lviv just looks prettier because it has less of Soviet architecture legacy. So developing the West might actually make the country more balanced in terms of economy.
Not quite. Ukrainian and Russian are pretty similar languages (unlike Dutch and French). More importantly:
1. Most Ukrainians are bilingual. Everyone had to learn Russian in school during Soviet times (while many in the west and north, especially in rural areas, spoke Ukrainian) and everyone has had to learn Ukrainian in school since independence while many in the east and south as well as most city folks spoke Russian.
2. Putin has supercharged Ukrainian nationalism, so even folks who never spoke any Russian in every day conversation would rather use Ukrainian now.
I feel like Stalker vs Witcher is a synecdoche for the Ukraine-Poland relationship. Ukraine had a medium hit with Stalker but didn’t really capitalise. Poland had the Wiitcher novels and parlayed them into a mega video game and TV empire.
Noah’s list is good but two more things Ukraine needs to sort out are land registry and pensions. Kiev is full of notaries because the land titles aren’t clear. And I think a well-audited Singapore style saving system could be good.
I feel like any article about Ukraine‘s economic prospects w/o a mention of their (dismal) demographics, even before the war, esp. in comparison to Germany (and their influx of expellees and Gastarbeiter) and Japan is very incomplete.
I'm not sure that matters that much. Youth bulge is good for topline numbers, but not clear how much it affects this kind of industrialization! Still, would be good for them to take a lot of skilled immigrants, and I think after this war they may have no trouble doing that.
Re: Ukraine having a dictator, uh, Zelensky kinda has been squelching opposition parties. One hopes that will not last past the war, but it's something to watch out for. To be fair, some of the opposition parties are clearly pro-Russian, and even funded by Putin's regime. So it's not completely crazy to suspect them of being a potential fifth column. Assuming he survives the war, he may have enough popular support -- and enough allies in the legislature -- that he can pass a Park Chung-hee style agenda, for at least several years, through democratic means.
Since he's relying on Kagan and the Institute for the Study of War for the mitary assessment, we should look to the related American Enterprise Institute to see what the plans are politically.
I would guess that their model would be some combination of Iraq and 1990s Russia.
One thing I missed from looking at what Ukraine (UA) was good at before the war: outsourcing software development. UA more or less was and is the extended workbench for many IT companies of all sizes in central Europe and the UA universities were "producing" more IT experts every single day. There was a rough estimate that the running cost of IT expert service fees in the UA was 11% of what a counterpart in France, Germany, Netherlands and the likes would cost. This is actually interesting since UA was the "go to" place when IT expert cost in Poland was considered too high and you compare Poland and UA a lot in your article.
This is an area that can swing back immediately after the war ends and I have some insight that it's still working in an amazing way.
Another point to look at is that UA was producing both agriculture produce and contributing to value chains e.g. in automotive and we hear today that lacking that is very disruptive and UA is a very important supplier that is hard to replace.
Normally this would indicate that UA companies were in a good market situation and should therefore gain in terms of GDP. On the other hand right before the war there was consensus that the UA economy and especially the public sector was in an awful state which doesn't correlate with being in a good market situation. There are several voices from people in the UA that value the way today's UA government is standing strong during the war but remind that UA was nearly a failed state before.
This would mean that before we start any money injection and investment initiatives there should be a convincing analysis where the money was going down the drain before (Oligarchs? corruption?) and only then it makes sense. Otherwise the initiatives won't reach the broader population but only some deep pockets.
To make matters worse many companies these days are reluctant to invest in UA because they feel that doing business there might be a struggle when you as a company adhere to strict Corp. Governance rules and stay miles away from areas with corruption.
Wasn't South Korea's success also largely driven by the absolutely mammoth US military aid that was provided? I seem to recall that US military aid to South Korea was something like 5x all foreign aid to all of Africa combined in the 20th century.
What would a comparable amount of US aid in 2022 be?
I feel like you're underselling the scope of aid South Korea was receiving. As late as 1972, Japan alone was giving South Korea $1.2 billion a year (in 2022 inflation adjusted dollars) in aid.
Posco (the steel company) was one of South Korea's earliest successes coming online in 1973 thanks to $150 million (in 1970 dollars; $1.1 billion in 2022 dollars) of Japanese money plus Japanese technical transfer.
Maybe I'll be proven wrong but I'm having a hard time seeing the West pour billions every year into Ukraine's development.
And if anything, that's an argument that Ukraine can become S Korea as it seems unlikely that Western military aid will dry up so long as Russia is perceived as threatening to the West (which seems likely for decades even if Putin is somehow overthrown as none of the likely successors in Russia are likely to be peaceful hippies).
I'm not sure where you're getting your numbers, but US military aid to Korea in terms of size was comparable to US aid to France since the end of WW2. In terms of total assistance from the US, Korea is comparable to the UK. Seems a bit of a stretch then to chalk much of growth of the Korean economy to aid, especially given Egypt and Vietnam dwarf Korea in terms of aid received from the US but have much lower income.
When reading this, I initially thought 'this is premature', but Noah is right - it's useful to think about this now. Besides, it's the best way for economists to contribute. Well, non-Ukrainian economists at least.
The South Korean path sounds to me rather risky at Ukraine's current state. It can devolve into the state being forced to support a few failing 'champions' held by favored oligarchs - socialized risk, private gain. We saw in Russia itself the risks of a premature ambitious economic plan before rule of law. Also, when SK did this, this was less competition since, well, fewer countries knew this path was possible.
I don't think security would be a big problem for the Poland/FDI path. Even today Western Ukraine is relatively safe; and even the Kremlin in its dreams had considered giving up on Western Ukraine and ceding it to Poland or a rump state. I think there's a bigger risk of the foreign companies being unaccountable and acting as oligarchs/colonists. There are quite a few complaints in E. Europe about German car manufacturers. I wonder what could be done in EU level to mitigate that?
Very nice and concise piece about comapring the Polish and SK way of development.
The two things I was missing in the comparision with Poland is:
1, Initial FDI in CEE countries were based on the capital scarcity after 45 years of communism and Soviet Union and liberalization+privatization based on the Washington consensus in the 1990s, and further accelerated by EU membership from 2004. This inflow by the way came to a massive halt after the 2008 crisis and only restarted in mid 2010s. Ukraine in contrast does not seem to be accepted soon into the EU, rather being left in a Turkey type of limbo - since I assume the EU does not want direct conflict with Russia.
2, Even though initially CEE (especially Visegrad countries) were also not part of the customs union, they were close enough, say a 6 hour drive with good infrastructure to the West. Ukraine, although being 2 hours flight away from Berlin is far far away on road also. Lviv from Budapest (which is by far not the centre of Western Europe) is a 10 hour drive. Railways would be a solution, Ukraine has a nice network, but they have Russian gauge railways, meaning far more planning for international shipping of goods once they aim to connect into the European trade network with logistical centers at the borders and massive investments in alternative shipping forms. Seaways could be a solution, but only if they retain Odessa. So there are huge obstacles before market access and integration.
Solid perspective. I think it starts and ends with joining the EU and NATO, as it was is Poland. Reality after a war FDI will not flood in until security is garunteed, i.e. NATO. After that, specilization as you mention with Poland will filter in and wealth and prosperity will grow.
I think one huge impediment to future Ukrainian prosperity that you didn't mention is demographics. Before the war, Ukraine had already lost a staggering eight million people since the breakup of the Soviet Union, largely due to mass emigration. Ukraine also has an extremely low birth rate, even lower than Poland's, which could make it difficult to replicate its success, let alone South Korea's which had a rapidly growing population during its economic miracle. The current refugee crisis will only worsen Ukraine's demographic woes. The potential for a breakthrough unfortunately seems bleak to me, unless they can join the EU or something.
Ukraine's are way worse. Poland's population has essentially been stagnant for thirty years while Ukraine's has been sharply decreasing. Also Poland has other factors going for it like proximity to Germany. As Noah mentions, companies may be scared to set up shop all the way in Ukraine if there's the constant possibility of another war.
Why not use all the Russian reserves blocked by the West and held in Western banks as reparations to rebuild everything the Russians blew up for starters?
Formally, in order to pay reparations, there should be declaration of war, otherwise is weaponisation of the dollar system. To be honest, I am not sure how big are the reserves that are frozen, because a big chunk of the reserves is gold, which is stored in Russia.
??? Call it whatever. Weaponization of the dollar system it is, then. Don't invade other countries. It's silly to have to depend on Russia having to declare war before having to do anything to them.
That's like saying that we can't punish a party for committing war crimes if they don't declare war.
Would Ukraine benefit from a Special Economic Zone centered on one of its cities, like China did adjacent to Hong Kong?
Creating a designated area and saying "export businesses and FDI especially welcome here" seems to help overcome both incumbent resistance to reforms (they can be isolated to a small area at first) and foreign investor nervousness (they can expect a critical mass of development-oriented services sooner if it's all happening in one area).
Actually yeah that's probably a great idea. I'm thinking Lviv, which is at lowest risk of Russian bombardment.
My understanding (admittedly weak) of Ukrainian politics in the past decade or two is that it had some similarities with Belgium - a geographic divide between a poor part that spoke the same language as their big neighbor, and a rich part that wanted greater global integration. Putting economic development tools primarily in the west of Ukraine seems like it could exacerbate these internal tensions, unless you encourage greater internal migration of Russian speakers from the east into the richer west.
The Western Ukraine is less industrialized and generates lower fraction of the countries GDP than the East. Lviv just looks prettier because it has less of Soviet architecture legacy. So developing the West might actually make the country more balanced in terms of economy.
Not quite. Ukrainian and Russian are pretty similar languages (unlike Dutch and French). More importantly:
1. Most Ukrainians are bilingual. Everyone had to learn Russian in school during Soviet times (while many in the west and north, especially in rural areas, spoke Ukrainian) and everyone has had to learn Ukrainian in school since independence while many in the east and south as well as most city folks spoke Russian.
2. Putin has supercharged Ukrainian nationalism, so even folks who never spoke any Russian in every day conversation would rather use Ukrainian now.
You probably meant "anything but Russian" rather than "any Russian" in the last sentence, otherwise there's no contradiction.
Right.
this is brilliant, thanks!
I feel like Stalker vs Witcher is a synecdoche for the Ukraine-Poland relationship. Ukraine had a medium hit with Stalker but didn’t really capitalise. Poland had the Wiitcher novels and parlayed them into a mega video game and TV empire.
Noah’s list is good but two more things Ukraine needs to sort out are land registry and pensions. Kiev is full of notaries because the land titles aren’t clear. And I think a well-audited Singapore style saving system could be good.
The only valid response to that comparison is: "Hmmmmmmmmmm."
I feel like any article about Ukraine‘s economic prospects w/o a mention of their (dismal) demographics, even before the war, esp. in comparison to Germany (and their influx of expellees and Gastarbeiter) and Japan is very incomplete.
I'm not sure that matters that much. Youth bulge is good for topline numbers, but not clear how much it affects this kind of industrialization! Still, would be good for them to take a lot of skilled immigrants, and I think after this war they may have no trouble doing that.
Note that Poland and South Korea's post-1990 growth has come in the context of fairly dismal demographics (and limited immigration).
Yep, Poland had awful demographics after Communism fell and still grew.
Re: Ukraine having a dictator, uh, Zelensky kinda has been squelching opposition parties. One hopes that will not last past the war, but it's something to watch out for. To be fair, some of the opposition parties are clearly pro-Russian, and even funded by Putin's regime. So it's not completely crazy to suspect them of being a potential fifth column. Assuming he survives the war, he may have enough popular support -- and enough allies in the legislature -- that he can pass a Park Chung-hee style agenda, for at least several years, through democratic means.
What would you recommend they do to improve the rule of law, reduce corruption and flatten the oligarchs?
Since he's relying on Kagan and the Institute for the Study of War for the mitary assessment, we should look to the related American Enterprise Institute to see what the plans are politically.
I would guess that their model would be some combination of Iraq and 1990s Russia.
One thing I missed from looking at what Ukraine (UA) was good at before the war: outsourcing software development. UA more or less was and is the extended workbench for many IT companies of all sizes in central Europe and the UA universities were "producing" more IT experts every single day. There was a rough estimate that the running cost of IT expert service fees in the UA was 11% of what a counterpart in France, Germany, Netherlands and the likes would cost. This is actually interesting since UA was the "go to" place when IT expert cost in Poland was considered too high and you compare Poland and UA a lot in your article.
This is an area that can swing back immediately after the war ends and I have some insight that it's still working in an amazing way.
Another point to look at is that UA was producing both agriculture produce and contributing to value chains e.g. in automotive and we hear today that lacking that is very disruptive and UA is a very important supplier that is hard to replace.
Normally this would indicate that UA companies were in a good market situation and should therefore gain in terms of GDP. On the other hand right before the war there was consensus that the UA economy and especially the public sector was in an awful state which doesn't correlate with being in a good market situation. There are several voices from people in the UA that value the way today's UA government is standing strong during the war but remind that UA was nearly a failed state before.
This would mean that before we start any money injection and investment initiatives there should be a convincing analysis where the money was going down the drain before (Oligarchs? corruption?) and only then it makes sense. Otherwise the initiatives won't reach the broader population but only some deep pockets.
To make matters worse many companies these days are reluctant to invest in UA because they feel that doing business there might be a struggle when you as a company adhere to strict Corp. Governance rules and stay miles away from areas with corruption.
Wasn't South Korea's success also largely driven by the absolutely mammoth US military aid that was provided? I seem to recall that US military aid to South Korea was something like 5x all foreign aid to all of Africa combined in the 20th century.
What would a comparable amount of US aid in 2022 be?
Military aid was helpful but it wasn't a major cause of growth, which took off more than a decade after the military aid started flowing.
I feel like you're underselling the scope of aid South Korea was receiving. As late as 1972, Japan alone was giving South Korea $1.2 billion a year (in 2022 inflation adjusted dollars) in aid.
Posco (the steel company) was one of South Korea's earliest successes coming online in 1973 thanks to $150 million (in 1970 dollars; $1.1 billion in 2022 dollars) of Japanese money plus Japanese technical transfer.
Maybe I'll be proven wrong but I'm having a hard time seeing the West pour billions every year into Ukraine's development.
I think it's more likely than not. European politicians are already talking about a Marshall Plan for Ukraine.
And if anything, that's an argument that Ukraine can become S Korea as it seems unlikely that Western military aid will dry up so long as Russia is perceived as threatening to the West (which seems likely for decades even if Putin is somehow overthrown as none of the likely successors in Russia are likely to be peaceful hippies).
I'm not sure where you're getting your numbers, but US military aid to Korea in terms of size was comparable to US aid to France since the end of WW2. In terms of total assistance from the US, Korea is comparable to the UK. Seems a bit of a stretch then to chalk much of growth of the Korean economy to aid, especially given Egypt and Vietnam dwarf Korea in terms of aid received from the US but have much lower income.
I really enjoyed learning about Poland and South Korea's economies.
When reading this, I initially thought 'this is premature', but Noah is right - it's useful to think about this now. Besides, it's the best way for economists to contribute. Well, non-Ukrainian economists at least.
The South Korean path sounds to me rather risky at Ukraine's current state. It can devolve into the state being forced to support a few failing 'champions' held by favored oligarchs - socialized risk, private gain. We saw in Russia itself the risks of a premature ambitious economic plan before rule of law. Also, when SK did this, this was less competition since, well, fewer countries knew this path was possible.
I don't think security would be a big problem for the Poland/FDI path. Even today Western Ukraine is relatively safe; and even the Kremlin in its dreams had considered giving up on Western Ukraine and ceding it to Poland or a rump state. I think there's a bigger risk of the foreign companies being unaccountable and acting as oligarchs/colonists. There are quite a few complaints in E. Europe about German car manufacturers. I wonder what could be done in EU level to mitigate that?
Very nice and concise piece about comapring the Polish and SK way of development.
The two things I was missing in the comparision with Poland is:
1, Initial FDI in CEE countries were based on the capital scarcity after 45 years of communism and Soviet Union and liberalization+privatization based on the Washington consensus in the 1990s, and further accelerated by EU membership from 2004. This inflow by the way came to a massive halt after the 2008 crisis and only restarted in mid 2010s. Ukraine in contrast does not seem to be accepted soon into the EU, rather being left in a Turkey type of limbo - since I assume the EU does not want direct conflict with Russia.
2, Even though initially CEE (especially Visegrad countries) were also not part of the customs union, they were close enough, say a 6 hour drive with good infrastructure to the West. Ukraine, although being 2 hours flight away from Berlin is far far away on road also. Lviv from Budapest (which is by far not the centre of Western Europe) is a 10 hour drive. Railways would be a solution, Ukraine has a nice network, but they have Russian gauge railways, meaning far more planning for international shipping of goods once they aim to connect into the European trade network with logistical centers at the borders and massive investments in alternative shipping forms. Seaways could be a solution, but only if they retain Odessa. So there are huge obstacles before market access and integration.
Solid perspective. I think it starts and ends with joining the EU and NATO, as it was is Poland. Reality after a war FDI will not flood in until security is garunteed, i.e. NATO. After that, specilization as you mention with Poland will filter in and wealth and prosperity will grow.
I think one huge impediment to future Ukrainian prosperity that you didn't mention is demographics. Before the war, Ukraine had already lost a staggering eight million people since the breakup of the Soviet Union, largely due to mass emigration. Ukraine also has an extremely low birth rate, even lower than Poland's, which could make it difficult to replicate its success, let alone South Korea's which had a rapidly growing population during its economic miracle. The current refugee crisis will only worsen Ukraine's demographic woes. The potential for a breakthrough unfortunately seems bleak to me, unless they can join the EU or something.
They'll probably join the EU, and Poland had terrible demographics too.
Ukraine's are way worse. Poland's population has essentially been stagnant for thirty years while Ukraine's has been sharply decreasing. Also Poland has other factors going for it like proximity to Germany. As Noah mentions, companies may be scared to set up shop all the way in Ukraine if there's the constant possibility of another war.
If Ukraine joins the EU it is going to experience a huge brain drain. It is actually hard to understand why they want it so much.
Well, that would mean a lot of remittances being sent home. And the EU does a lot to help out poorer areas.
Why not use all the Russian reserves blocked by the West and held in Western banks as reparations to rebuild everything the Russians blew up for starters?
I agree with that.
Because you cannot seizure Russian assets in an absence of actual declaration of war.
Eh, it could happen all sorts of ways. Call it reparations for terrorist actions by Russia then, if you don't call it a war.
Formally, in order to pay reparations, there should be declaration of war, otherwise is weaponisation of the dollar system. To be honest, I am not sure how big are the reserves that are frozen, because a big chunk of the reserves is gold, which is stored in Russia.
??? Call it whatever. Weaponization of the dollar system it is, then. Don't invade other countries. It's silly to have to depend on Russia having to declare war before having to do anything to them.
That's like saying that we can't punish a party for committing war crimes if they don't declare war.
USA or Europe can declare, whoever wants to punish Russia can do it