Economists estimate that $ 220-540 billion will be needed, but reforms will also be needed.
When the war ended, the country looked very devastated . Almost all industrial structures were destroyed by air strikes. The infrastructure has become unusable. And big cities were destroyed by bombing. Russian forces occupied the east, and millions fled their brutality. However, the West German economy recovered after 1945, which quickly became known as the Wirtschaftswunder – an economic miracle.
Unlike Nazi Germany, Ukraine is not an aggressor. And she has a chance to become a winner. At the same time, rebuilding the country will be a monumental task, – writes The Economist. The war, unleashed by Vladimir Putin, has claimed the lives of thousands of innocent people and forced millions more to flee. Dwelling houses, hospitals, bridges and ports turned into ruins. As the end of the war is not yet in sight, new destruction can be expected. Officials and economists assess the damage and, based on the experience of Germany and other countries, think about how to organize further reconstruction.
Researchers from the Center for Economic Policy Research (CEPR) have estimated that the total cost of rebuilding Ukraine will cost around $ 220-540 billion. The Ukrainian government called about the same figure. The ways in which reconstruction is organized, as well as the reforms that will accompany this process, will be no less important than budgets. If everything is done correctly, it is possible to turn the economy suppressed by the oligarchs into a more open and dynamic one.
It will not be easy to repair the damage caused by the war to the Ukrainian economy. The Vienna Institute for Economic Research (WIIW) estimates that the affected regions account for 29% of the country's GDP. Electricity consumption fell by a third compared to last year. According to the National Bank, 30% of companies across Ukraine have completely shut down, and another 45% have reduced production. The World Bank estimates that the Ukrainian economy will shrink by 45% in 2022.
Read also: Rebuilding Ukraine. The experience of Chernobyl resettlementThe government is trying to reduce the damage wherever it can. Western aid of $ 7 billion has helped keep government spending afloat. Farmers received $ 675 million to start the sowing campaign. Industry can apply for assistance in transporting production within Ukraine. Russia has blocked export routes in the Black Sea. Therefore, Kyiv and the EU are trying to establish trade through land. 80% of Ukrainian exports can still leave the country.
At the same time, the cost of rebuilding the war-torn regions will be considerable. There are three main tasks ahead. The first is to clear the affected areas of mines and explosive debris. The extent of the mine is not yet known. However, previous experience shows that the work will be quite expensive. Even before the start of a full-scale Russian invasion, the Ministry of Defense of Ukraine estimated that the demining of Donbass, where the Russian army brought the war in 2014, will require 650 million euros. And in Iraq, a decade-long mine action cost about a billion dollars. The economic benefits of demining can be very great. Mozambique was once littered with minefields. After their elimination, the country's GDP grew by 20%.
It will also be expensive to provide housing and food. Given that Ukraine is a food giant, it will be able to feed its citizens. However, the number of internally displaced persons will increase. The Kyiv School of Economics estimates that the value of the destroyed housing stock is $ 29 billion. But it will be even more expensive to rebuild infrastructure and industrial facilities. Ukrainian experts estimate that the reconstruction of everything from power plants to factories, bridges and roads will cost more than $ 50 billion. But halting production, maintenance and investment will mean that even the surviving infrastructure will have to be upgraded. A WIIW study found that after the invasion of Donbas in 2014, such a decline led to the loss of about 60% of war-related infrastructure by the end of 2019. Therefore, the calculations of the Government of Ukraine, which show that this time the restoration of infrastructure and industry will cost $ 119 billion, are not far from the truth.
Reconstruction will require a plan, finances, and a clear process for allocating money between projects. The Government of Ukraine has established a reconstruction fund. And the ministries are making proposals that need to be rebuilt. The Ukrainian Ministry of Finance loses about $ 2 billion in revenue each month. So you need extra money. The reconstruction process will only increase the burden on the budget. A government that is already heavily in debt may find itself in a situation where it will not be able to borrow. So you need a combination of debt relief and grants.
Funding should come from Western governments, international organizations and private investors. A proposal to use frozen Russian assets is also being discussed. But it is unlikely to happen, unless such a point appears in the future peace agreement. Grants, especially from the EU, are not new. Poland, which is similar in population to Ukraine, received 106 billion euros in 2014-2020 to finance the agricultural sector and investment. Private business financing can take the form of subsidized loans, for example, from the EBRD. In recent years, the bank has invested about $ 18 billion in Ukraine.
Read also: Reconstruction of Chernihiv will take at least four years – the mayor
The next issue is the distribution of funds, which can be a difficult task for an economy that has been poisoned by beneficial interests for many years. Since 2014, Ukraine has made its tenders more competitive. However, this time the contracts will be much larger. CEPR proposes to use framework agreements – standing contracts with firms to supply a specific product at a fixed price – and open contracts that provide transparency even without tenders. The last stage of Ukraine's reconstruction means that the country's economy needs to be helped to prosper in the long run. In 2019, the country's GDP per capita was lower than at the time of the collapse of the USSR. This was a landmark illustration of the long absence of reforms. Many of the 1,500 state-owned enterprises were either unprofitable or unprofitable. Even before the full-scale invasion, the IMF called on the government to strengthen anti-corruption laws and strengthen the rule of law.
Ukraine's political support for complex reforms and their verification in the post-war investment process will be important for the success of the reconstruction. It would be good if the government saw the process as an opportunity to make the economy more modern and competitive (and the industrial sector more “green”). Experience also shows that closer integration with Europe, as it did with West Germany many decades ago, can also help succeed. Poland's rapid development is also linked to integration. In the 15 years since joining the EU, the country's GDP per capita has increased by more than 80%.
Ukraine has already tried to build closer ties with the West. Ukrainian exports to the EU grew to 36% as of 2020. At this time, trade with Russia fell from 18% to 5.5%. One way to encourage reforms is to make them a requirement for greater integration with the European market and supply chains, for example, through the roadmap to EU membership.
There is a difficult process ahead. Reforming institutions requires political will. The longer the war lasts, the more damage will be done to Ukraine and the more difficult the reconstruction process will be. Also, no funding will ever alleviate the horrors of war. However, careful planning can at least pave the way for a brighter and more prosperous future.
Earlier Ukraine received a questionnaire for candidate status Of the European Union. The document was handed over personally after talks with Zelensky by European Commission President Ursula von der Leyen. She stated that this is an accelerated procedure, as relations between Ukraine and the EU are so developed that Brussels does not need answers.
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