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A Marshall Plan for Ukraine

Whilst fighting continues in Donbas, governments and economists around the world are now thinking about a potential reconstruction plan for Ukraine. The scope of this project would mirror that of the post-war Marshall Plan and ultimately must take into account the peculiarities of Ukraine’s position.

June 3, 2022 - Valerii Pekar - UkraineAtWar

Anti-tank hedgehogs in the center of the Ukrainian capital on Independence Square and Khreshchatyk Street in early March 2022. Photo: Drop of light / Shutterstock

For several weeks now, the world’s media have been discussing Ukraine’s possible recovery plan after the war. This is often referred to by journalists and economists as a new “Marshall Plan”, directly tying such moves to the well-known post-war aid plan for Europe.

It is extremely important for all involved to understand several key issues related to this plan.

Strategic triangle

I will start with the fact that Ukraine has three tasks to complete:

  • Rebuilding — rebuilding destroyed infrastructure, housing and production facilities.
  • European integration — gaining the status of a candidate and then a member of the European Union.
  • Modernisation — a set of changes to move the country to the next stage of its development.

These three processes should be preferably performed simultaneously. The problem is that they contradict each other. This is not obvious at first glance so let’s look closely at them.

Rebuilding requires the fastest possible solutions and preferably the cheapest. At the same time, European integration requires the right solutions that meet EU standards. Finally, modernisation requires sustainable, next-level solutions that are expensive and slow. These three types of reform cannot be done at the same time. Indeed, even two of the three will be difficult to achieve simultaneously.

The problem of destroyed housing offers a clear example of this problem. Any rebuilding plan needs to give everyone who was deprived of a home by the war the cheapest and simplest housing as soon as possible. Roughly speaking, this will accommodate everyone in housing essentially resembling “cardboard boxes”. Such temporary solutions could shape the face of Ukrainian cities for more than a century, much like the khrushchyovka. This cheap low-standard housing built after the Second World War under Khrushchev ultimately allowed millions of people living in barracks, basements and dugouts to have housing. But European integration does not allow for such quick and simple solutions, as in a few years they will have led to significant economic and social problems. This includes excessive energy consumption, environmental risks and “ghettoisation”. At first, modernisation requires a rethink of the country’s demographic situation and the future needs of Ukraine. It requires slow and balanced decisions. But if all the funding is spent on rebuilding, then modernisation will never happen.

Another important aspect of this triangle is economic freedom. Modernisation requires maximum economic freedom to include the creative energy of millions of Ukrainians, to give them an incentive to return home if they temporarily left — or not to leave if they are still in the country and considering emigration. On the other hand, economic freedom attracts foreign investment, which is key to increasing productivity, another aspect of modernisation. On the contrary, European integration requires some restrictions on economic freedom in order to comply with European rules and regulations. Rebuilding does not care about economic freedom at all. Everything should be done as soon as possible to provide people with a roof over their heads, as well as water and electricity supplies. If only a few companies win all the tenders with a lack of transparency, then in terms of fast rebuilding these requirements would only amount to a small fee.

These issues are not purely economic. They affect other areas, including politics. Rebuilding is faster under authoritarian rule but such an approach makes European integration and modernisation impossible. It is important to remember that European integration does not always mean modernisation. European integration without modernisation means becoming the “backyard of Europe”, whilst modernisation without European integration means problems with finding markets and money. A form of modernisation running in parallel with European integration means an endless process without results. How can you combine European integration with economic freedom, which, even in the current circumstances, provides Ukrainians with more innovative digital banking services and more high-quality street coffee than some Europeans?

It is impossible to operate quickly, cheaply and qualitatively at the same time. It is impossible to build a system that is stable, open and efficient at the same time. This is the aforementioned “strategic triangle”. We will have to sacrifice something. But what? European integration, which gives us our desired access to markets, financing and stable rules? Rebuilding that promises a fast solution to the devastation? Modernisation that gives us hope for a new country instead of a post-Soviet legacy?

The choice made in the strategic triangle will determine the outlines of the next decade’s processes, as well as the format of the country for the next half century.

Architecture of implementation

Another important question is who will control the process. At one end of the range of solutions is the desire of some Ukrainian circles to control all the process solely. This can be roughly expressed as “We have defeated Putin, you owe us, give us money and do not ask for anything.” Of course, this is unacceptable to western governments and international institutions. These bodies remember Ukrainian corruption and the repeated deception of international partners, when money was allocated on the false promises of reforms.

At the other end of the range of solutions is the position of certain western circles, which say that “You will steal everything, you cannot be given money at all, so we will create a project office, only Americans and Europeans will work there and they will sign all the cheques.” Ukraine cannot be satisfied with such an approach. It means that our Ukrainian vision, strategy and interests will be completely ignored. The country will ultimately not be the “owner” of the plan. This is the unpleasant state of affairs that local anti-western politicians call “external governance” ( the native population can’t resolve problems on its own because of weak institutions). Some representatives of the Ukrainian side have even said that all the money should be given to Ukraine, as at least 80 per cent will be used for the development of the country. This group believe that if the funds are distributed on the West’s side, 40 to 60 per cent will end up covering administrative costs. Ukraine will get only the rest.

The two extreme positions mentioned above outline the spectrum of possibilities. There are numerous intermediate options between them, namely bad compromises. After all, a compromise is usually a decision that does not suit either side. The way out is, as always, not to seek a compromise between the two extremes but to add one more dimension. Both sides need to find a solution to the next level of complexity. But we must understand that any agreement will work more slowly in these circumstances.

There are more questions than answers

The above two key issues are the most important and complex. However, there are many others.

For instance, who will take prominence in the process, the United States or the European Union? Obviously, there are different approaches and priorities. How do you get numerous international financial organisations with different rules and approaches to work together in a single format? How do you ensure a balance between short-term interests (politicians always choose them because they think about upcoming elections) and long-term ones? Furthermore, how do you balance the three financing mechanisms of grants (obviously limited in size), loans (which Ukraine will have to repay, but from what revenues?) and investments in Ukrainian assets (now greatly underestimated, which is contrary to the interests of Ukrainian business). Finally, how do you combine reconstruction, European integration and modernisation with solving security problems? The countries of Western Europe after the Second World War, as well as the countries of Eastern Europe after the fall of communism, solved the problem of security with the help of NATO. However, Ukraine will have to take on a significant part of this task.

I would especially like to emphasise the question of what will be the economic policy of post-war Ukraine? Will we be able to significantly boost our economic freedom by breaking out of our current 130th place in the world and make the country attractive for domestic and foreign investment? Or will the supporters of strengthened state regulation and the leading economic role of the state win? Ukrainian business recently stressed its desire for economic freedom and innovative entrepreneurship. Indeed, it is reasonable to believe that money will come only in exchange for real reforms, not promises.

Finally, who wants to be Mr. or Mrs. Marshall? Who among the world’s leading politicians will put his or her name to the project, take on personal leadership and responsibility, and thus the possible political dividends and risks? The very fact that we are still discussing a new Marshall Plan, named after the post-war US Secretary of State, shows that there is no new leader yet.

Making a puzzle is not easy

How much money does Ukraine need? The Ukrainian side estimates the country’s losses from the Russian aggression at 500 billion US dollars. This is not to be confused with Ukraine’s current budget deficit of about five billion a month, which also needs to be covered. In fact, this is the cost of waging war for the country. This huge figure of half a trillion has been repeatedly criticised as inflated. Even if the realistic figure is two or three times lower, there would still not be enough funds available. Recent decisions by the European Commission on nine billion euros, as well as the United States’ 40 billion dollars, are money for current needs and not for reconstruction and development.

Obviously, the funds will have to be collected over a long time and in different places. Ukraine will not neglect any sources of funding, including Russian reparations (a long-term prospect), funds from the sale of seized Russian assets, direct assistance to Ukrainian cities from sister cities, or certain counties’ special projects aimed at the reconstruction of some Ukraine’s regions.

The bulk of the required amount of money should come in the form of private sector investments and loans. Of course, this requires the private sector to feel confident and be protected by the rule of law and effective antitrust policies. Businesses should also feel that they are heard by the government. It is also necessary to share the risks of western investors, both in the form of guarantees from their governments and through traditional insurance mechanisms.

Let me note one more thing. We are now approaching tasks of such a level of complexity that no one can be sure of the right strategy. The only way forward is maximum decentralisation, which will make the country and any discussed plans “antifragile” in the words of author and trader Nassim Taleb.

Today, almost a dozen different groups are writing up different versions of the Marshall Plan. The most famous of these plans are already being actively discussed. For example, there is the United24 government plan and “A Blueprint for the Reconstruction of Ukraine”, which has been signed by several prominent economists. The World Bank, IMF and EBRD all have their own versions.

These plans are now featuring prominently at various international events, including the Davos Forum and a conference on Ukrainian reforms in Lugano, Switzerland. Hopefully, we shall see from one event to another a better and more detailed reconstruction and development plan.

It is very important that the voices of Ukraine’s civil society and business, and not only its government, are heard in these platforms. This is because any decisions in the field of economic policy will be implemented primarily by Ukrainian entrepreneurs. All of the benefits and failures will subsequently be felt by Ukrainian citizens.

War brings incredible pain, blood, suffering and destruction. At the same time, it brings a chance to change society and the state. The greatest fear of Ukrainians today is not a defeat, but the fear that nothing will change after victory. We need to do everything possible not to waste this chance.

Valerii Pekar is a co-founder of the Nova Kraina Civic Platform, a lecturer at the Kyiv-Mohyla Business School and a former member of the National Reform Council.

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