BERLIN — WHEN THE war ended, the country resembled a wasteland. Almost all industrial structures had been flattened by air raids, infrastructure rendered unusable and large cities bombed out. Russian-led forces occupied the east, with millions fleeing their brutality. But West Germany’s economy recovered strongly after 1945, in what would soon be coined the Wirtschaftswunder (economic miracle).
Unlike Nazi Germany, Ukraine is not the aggressor, and may yet be victorious. Nonetheless, rebuilding will be a monumental task. Vladimir Putin’s war has so far claimed the lives of thousands of innocents and displaced millions; it has laid waste to houses and hospitals, bridges and ports. With no end to the hostilities in sight, more destruction will surely follow. Officials and economists are assessing the damage and, drawing on lessons from Germany and elsewhere, thinking about how to manage the eventual recovery.
Researchers from the Centre for Economic Policy Research (CEPR), a network of economists, put the total cost of rebuilding Ukraine in the region of €200bn-500bn ($220bn-540bn), roughly in line with the government’s own calculations. The way in which reconstruction happens, and the reforms that accompany it, will be just as important as the money spent. Done well, it could transform an economy that was once captured by oligarchic interests into something more open and dynamic.
Working out the hit to the Ukrainian economy from war is a difficult business. The Vienna Institute for International Economic Studies (WIIW), a think-tank, reckons that the affected regions together make up about 29% of Ukrainian output. Electricity consumption, a proxy for activity, is down by around a third compared with a year ago. According to a survey by the central bank, 30% of firms around the country have stopped producing entirely and another 45% have reduced their output. The World Bank reckons that GDP will contract by 45% this year.
The government is trying to limit the damage where it can. Aid from the West, of around $7bn so far, has kept the public finances afloat. Farmers have been given 20bn hryvnia ($675m) so that they can continue to work their fields. Manufacturers can apply for help to relocate within Ukraine. With Russia blockading Ukraine’s main export route through the Black Sea, the government is working with the EU to make trading by land easier. It says that 80% of exports can still leave the country.
Even so, rebuilding war-torn regions will come with a hefty price-tag. Three main tasks lie ahead. One is clearing affected areas of landmines and other explosive debris. Although the full extent of contamination is far from clear, past experience gives a sense of the costs involved. Before this war Ukraine’s defence ministry put the cost of de-mining the Donbas region, which was invaded by Russia in 2014, at €650m. A de-mining effort on the scale of Iraq’s would cost roughly $1bn over a decade. The economic benefits of de-mining could be large. Mozambique was once heavily mined; a recent study estimates that the boost from de-mining it, which took well over two decades, came to about 20% of GDP.
Food and shelter will be a bigger expense. As a producer of grains and other agricultural commodities, Ukraine will probably be able to feed those in need. But the number of internally displaced people will continue to rise: at the time of writing it stood at 7.1m (a further 4.5m have fled the country). A tracker put together by the Kyiv School of Economics puts the value of destroyed housing at $29bn.
A bigger-ticket item still is rebuilding damaged infrastructure and industrial facilities. The Kyiv School reckons that the destruction to everything from power plants and factories to bridges and roads so far exceeds $50bn (see chart 1). But lost production, a lack of maintenance and missing investment mean that even the infrastructure that is still standing will need upgrading. Another study by WIIW finds that, after the invasion of Donbas in 2014, such depreciation made up 60% of war-related infrastructure losses by the end of 2019. The prime minister’s estimate of a cost of $119bn to infrastructure and industry this time may therefore not be far off.
Reconstruction will require a plan, finance and a process for allocating money to projects. Ukraine’s government has set up a recovery fund, and ministries are putting forward proposals for what needs rebuilding. With the finance ministry losing revenues of about $2bn a month, some money will be needed to prop up the public finances. Reconstruction will only add to the strain. The government, which is already highly indebted, may prove unable to borrow or repay its loans. A combination of debt relief and grants seems likely to be needed.
Funding will have to come from Western governments, international organisations and private investors. (A proposal to use frozen Russian assets has been floated, but seems unlikely unless decided as part of a peace settlement.) Grant funding, especially from the EU, is not unheard of: Poland, with a population similar in size to Ukraine’s, received €106bn in agricultural and investment funds between 2014 and 2020. Financing for private businesses could take the form of subsidised loans, such as from the European Bank for Reconstruction and Development (EBRD). It has invested about $18bn in Ukraine over the years.
The next question is allocating the money, a tricky task in an economy that has long been dominated by vested interests. Ukraine has made its process for tenders more competitive since 2014, but the contracts this time will be much larger. The CEPR suggests the use of framework agreements—standing contracts with firms to deliver a certain product for a fixed price—and open contracts that, even without tenders, ensure transparency.
The final stage of rebuilding Ukraine will involve helping its economy flourish over the long term. In 2019 GDP per person, in real terms, was lower than it was at the fall of the Soviet Union—a damning testament to the long-standing lack of reform in the country. Many of Ukraine’s 1,500 functioning state-owned enterprises are lossmaking or barely profitable. Even before the war the IMF had urged the government to strengthen its anti-corruption framework and the rule of law.
Ukrainians’ political support for difficult reforms and their scrutiny of the post-war investment process will be crucial to make reconstruction a success. It might help that the government seems to see the process as an opportunity to make the economy more modern and competitive (and its industrial sector greener).
Reconstructions of the past, meanwhile, suggest that success could also come from closer integration with Europe, as happened with West Germany decades ago. Poland’s rapid growth is also often attributed to integration: in the 15 years after it joined the EU, its GDP per person increased by more than 80%.
Ukraine had already been turning westwards. The share of its exports going to the EU rose from roughly 30% in 2014 to 36% in 2020, while the share going to Russia fell from 18% to 5.5% (see chart 2). One way to encourage reforms would be to make them a requirement for further integration into European markets and supply chains—say, through a path to EU membership. “The beauty of accession is that it would create consensus within Ukraine about the endpoint of a painful reform process and lock in the direction of the reforms,” argues Beata Javorcik of the EBRD.
None of this will be easy. Reforming entrenched institutions requires political will. The longer the war continues, the more damage is wrought upon Ukraine, and the harder the task of reconstruction becomes. Nor will any amount of spending ever make up for the horrors of war. Yet careful planning could, at least, ensure a brighter, richer future.
By The Economist
