The Marshall Plan for Ukraine: open issues
23 May, 2022
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For several weeks, the Ukrainian and world media have been discussing the plan for recovery of Ukraine, as called by journalists and economists the Marshall Plan by analogy with the well-known plan to help Europe after World War II.
It is extremely important for Ukrainian society to understand several key issues regarding this plan.
Strategic triangle
First of all, today Ukraine faces three priority tasks to be fulfilled:
- Reconstruction: rebuilding destroyed infrastructure, housing and manufacturing to help a country recover from war.
- European integration: acquiring the status of candidate, followed by membership of the European Union.
- Modernization: a set of changes aimed to move the country to the next level of development.
Such three processes should be launched preferably in parallel. But the main problem is that they contradict to each other. It is not so obvious to everyone, so let us take a closer look.
Reconstruction requires for decision-making as soon as possible, preferably the cheapest ones. European integration requires for correct solutions that meet EU standards. Modernization requires for sustainable solutions, next-level solutions being expensive and slow. Such three factors cannot be implemented simultaneously; usually even two of them are inaccessible at the same time.
For example, there is a problem of destroyed housing. Reconstruction needs to give all those displaced by the war the cheapest and the simplest housing as soon as possible, in other words, housing in cardboard boxes for everyone. Such temporary solutions can define face of the Ukrainian cities for over a century, like previously Khrushchev-era apartment blocks facilitated housing for millions of people who lived in barracks, basements and dugouts. European integration does not allow such quick and simple solutions, because they may cause significant economic and social problems within a few years, starting with excessive energy consumption and environmental risks, up to ghettoization. Modernization in general needs, first of all, thinking over the demographic situation and demands of future Ukraine; therefore, it requires for making slow and balanced decisions. But if all the funds are spent on reconstruction, modernization will never happen.
Another crucial aspect of this triangle is economic freedom. Modernization requires for maximum economic freedom in order to include creative energy of millions of Ukrainian men and women, to give them an incentive either to come back or not to leave. On the other hand, economic freedom attracts foreign investments; without them a fundamental increase in labor productivity aimed to enrich the country is impossible. In turn, European integration requires for restrictions on economic freedom in order to comply with European rules and regulations, and there may be additional restrictions, because European governments will think first of all about saving jobs and programs aimed to support their own producers, especially in agriculture. Reconstruction does not take care of economic freedom at all: everything should be done as soon as possible so that everyone could have shelter, water or electricity, and if the same companies obviously win all the tenders, this is a small price to pay for recovery rate, as treated in the interests of reconstruction.
Such issues are not purely economic, they also affect other spheres, including politics. Reconstruction goes faster under authoritarian rule, but this approach makes European integration and even modernization impossible. European integration does not always mean modernization, because no one is particularly concerned in emergence of a new tiger economy. European integration without modernization will cause reaching the outskirts of Europe, while modernization without European integration will awake problems with finding markets and money; however, modernization jointly with European integration will launch an endless process without results. How to combine European integration with economic freedom, which even in its current limited version provides for Ukrainians innovative digital banking services and quality coffee, which not all the Europeans have?
Fast, cheap and high-quality: it cannot happen simultaneously. It is impossible to build a stable, open and efficient system. This is the so-called strategic triangle. But which one among three principal aspects should be sacrificed? European integration that gives us the desired access to markets, financing and stable rules? Reconstruction that promises quick overcoming devastation? Or modernization that gives us hope for a new country instead of the post-Soviet legacy?
The choice in strategic triangle will determine outlines of the processes for the next decade and format of the country for the next fifty years.
Structure of launching the plan
One more keystone is the following: who will control over the process? From one side of spectrum, there is desire of the Ukrainian authorities, which can be expressed roughly like this: we defeated Putin, you owe us, you should give us money and shall not ask for anything. One Western diplomat notes that momentary weakness of the West has passed, in other words, they have been observing us for 30 years and know the whole our structure. Another Western diplomat highlights that they will remember everything they forgave us, referring to regularly repeated deception of Western partners, when funds were allocated under promises of reforms, while in fact funds were spent and reforms were not carried out.
From the other side of spectrum, there is position of certain Western circles thinking that we will steal everything, so no one shall grant costs in our favor; therefore, we shall create a project office, with only American and European experts engaged who will sign all the receipts. Such an approach is unfavorable for Ukraine: it means that our Ukrainian vision, Ukrainian strategy and interests will be completely ignored, Ukraine will not be deemed as owner of the plan. This is an unfavorable situation that local anti-Westerners call external rule: old-timers are unable to solve their problems independently due to weak institutions. Obviously, in such case, funds will be spent for development of the donor-state economies, not our own economy. Certain representatives of the Ukrainian side even declared the following: you shall give funds to Ukraine, we will steal maximum 20%, while the remaining 80% will be used for development of the country, because if the funds are distributed on your side, 40-60% will be consumed by administrative costs, while Ukraine will get only the remaining share.
Two aforesaid extreme positions outline the spectrum, with numerous intermediate options (i.e. bad compromises) lying between them. After all, usually a compromise is a solution that does not suit either party. The solution is usually aimed not to seek a compromise between two extremes, but to reach an additional dimension, finding a solution of the next level of complexity. But one should understand that it will work more slowly.
There are more questions than answers!
The above two key questions are the most crucial and the most complex, but the problem covers not only them.
Who will be Number One in the process: the USA or the European Union? Obviously, there are different approaches and priorities. How to combine numerous international financial organizations with different rules and approaches into a single structure? How to secure balance between short-term (Ukrainian politicians always choose them because they think about the next elections) and long-term interests? How to balance three funding mechanisms: grant aid (obviously in restricted amount), loans (to be repaid later, but from which proceeds?) and investments in Ukrainian assets (now greatly undervalued, which contradicts to the Ukrainian business interests). How to combine reconstruction/European integration/modernization with solving security problems? Security problem was solved by the Western European Countries after World War II and by the Eastern European Countries after the fall of communism, both with NATO assistance. But we will have to bear our own liability for on a significant part of this task.
Special attention should be drawn to one of the most vital questions: what will be economic policy of post-war Ukraine? Can we significantly raise economic freedom, rising from the current 130th place in global rating and making the country attractive for domestic and foreign investments? Will it result in victory of supporters of increased state regulation, socialist approaches and leading role of the state in economy? That is why Ukrainian business recently declared its clear position and principles (see.?Memorandum of the Coalition of Business Communities for the Modernization of Ukraine).
It is gratifying that Western policymakers, trained by Ukrainian deceptions, agree to grant funds only in exchange for actual reforms: first come – first served. These are quite optimistic news, but there are still many open questions.
Finally, who is Mr. Marshall or Ms. Marshall? Who among global leading policymakers will fix their signatures on the plan, assuming personal leadership and personal responsibility and, therefore, potential political dividends and numerous risks? The very fact that we are discussing the Marshall Plan developed by the American Secretary of State in the past, shows that there is no up-to-date leader yet.
It’s a complex puzzle!
How much money do they need? From Ukrainian part, losses incurred by the state due to Russian aggression make up $500 billion (one shall not confuse it with the current budget deficit of Ukraine amounting to ca. $5 billion per month, which also needs to be covered; in fact, this is the cost of waging war). Such a huge figure has already been repeatedly criticized as inflated, but even if the actual cost is twofold or threefold lower, there are still no such funds in the world. Recent EU Commission decisions on 9 billion euros and the US decisions on 40 billion dollars are treated as funds for current needs, not for reconstruction.
Obviously, the funds will have to be collected for a long time and in different places. Ukraine will not neglect any sources of funding – either Russian reparations (one will have to expect them for a long time until all legal formalities are settled), or funds from the sale of seized Russian assets, or direct aid to Ukrainian cities from sister cities, or special projects of friendly countries aimed to help in reconstruction of certain areas.
Major share of the required amount of funds should come in the form of investments and loans through the private sector: for that purpose, the private sector needs to exist, to feel confident, to be protected by honest courts and an effective antitrust policy, to feel that its voice is heard (see the Memorandum set above). The second matter to be required is sharing the risks of Western investors, both in the form of state guarantees provided by their governments and with by means of classical insurance mechanisms.
Here one a more crucial aspect should be noted. We are now approaching problems of such a level of complexity that no one can be sure of their correct strategy. The only way out is maximum decentralization, which will make the discussed plan and the country in whole anti-fragile (a term used by Nassim Taleb). It takes hundreds of different attempts, some of which will fail, but eventually the right way will be found.
Today, nearly a dozen different groups are writing different versions of the Marshall Plan, the most famous of them are already being actively discussed: namely the Government Plan United24?and A Blueprint for the Reconstruction of Ukraine, both signed by several famous economists. The World Bank, IMF, EBRD, etc. have their own versions of plans.
All the aforesaid issues, jointly with different versions of the plans, will soon be discussed at various international platforms, for example, at the conference organized by this week Vladyslav Rashkovan at the London School of Economics, at the Davos Forum, at the conference on Ukrainian reforms in Lugano (Switzerland) etc. No doubt, other events later will be held too. It is important that we could provide a better and more detailed reconstruction plan, event by event.
It is very important that voice of not only the Ukrainian authorities, but also the Ukrainian civil society and domestic business be heard on such platforms, because any decisions in economic policy will be implemented, first of all, by hands and funds of the Ukrainian entrepreneurs, while all benefits and failures will be felt by the Ukrainian citizens
War is incredible pain, blood, suffering, destruction. But it also gives a chance to change the society and the state. Today the biggest fear of people is that nothing will change after our victory, everything will remain the same as before outbreak of the war. We need to do all the best in order to prevent missing such historic chance.
