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With Russian missiles pounding apartment buildings, power plants, schools and roads, the glittering vision of a reconstructed post-war Ukraine seems impossibly far away. But an urgent battle of ideas has already begun over how to manage what would be Europe’s most extensive reconstruction project since the end of World War II.
Sparring has recruited heads of state and leaders of aid groups, universities and banks from around the world — representing governments, organizations and companies willing to donate or borrow the hundreds of billions of dollars that might be needed, as well as those who stand to profit from it.
Attention to saving the damaged cities and infrastructure of Ukraine is mainly focused on its cost. The struggle over the framework that will largely be expected to implement that restructuring has been going on below the surface, receiving much less public attention.
Any shift for Ukraine from a wartime to a peacetime economy promises to be fraught, opposing ideas for a strong central government that would target spending with a firmer hand against one with looser regulation dominated by free markets. There are other tricky, though perhaps less noticeable transitions that should be navigated at the same time.
Three decades have passed since Ukraine gained independence, but the Soviet legacy remains. This can be seen in the supply lines and transport networks that were created when Kiev and Moscow were part of one nation. Ukraine was engineered and equipped with Soviet-era designs, machinery and infrastructure that remained disconnected from Europe in many ways. For example, Ukrainian railway tracks are of a different size than European ones, which means that trains cannot easily cross borders.
Lack of integration exists in sector after sector. Parts for everything from nuclear reactors to refrigerators previously supplied by Russia will have to come from elsewhere.
Even more challenging is the legacy of Ukraine’s flawed and incomplete transition to a modern, democratic market economy after the collapse of the Soviet Union. Parts of its commercial world are plagued by corruption and cronyism. And Ukraine has yet to create resilient political institutions that support governance standards set by the European Union, which is likely to be its largest trading partner if the war is won.
This lack of an accountable, transparent and trustworthy public sector is at the heart of much of the debate about what Ukraine should look like and who gets to make those decisions.
“There’s this idealistic attitude that the government can direct resources and people will listen,” said Yuri Gorodnichenko, an economist at the University of California, Berkeley. “As someone who grew up in Ukraine,” he added, “it doesn’t work like that.”
“The government doesn’t have the capacity to regulate,” he said. “There is no professional, well-trained bureaucracy.”
Mr. Gorodnichenko contributed to reports on the reconstruction of Ukraine for the Center for Economic Policy Research in London, an independent network of economists. The group’s recommendations are broad, but among them is a call for “radical deregulation of economic activity” that includes more reliance on the market in allocating resources and running the economy, loosening labor laws and shifting political and economic controls away from central government to localities.
Such calls set off alarms.
“I think it’s just terrible,” said Joseph Stiglitz, a Columbia University economist and Nobel Prize winner. He worries that the kind of neoliberal approach he claims has brought inequality, environmental degradation, and inadequate housing and medical care to the United States and other countries is being promoted as a model for Ukraine.
Ukraine is clearly in crisis mode, struggling to feed, house and warm its population during the winter while waging war. Survival is the priority. Post-war reconstruction is expected to take at least a decade. Still, Mr. Stiglitz said decisions made today could affect what happened at the time.
Recent changes to the labor law approved by the Ukrainian parliament have become a flash point of differences. Mr. Stiglitz and other critics warn that worker protections are being stripped away, noting that it gives employers more freedom to set hours, change working conditions and fire workers, while weakening unions’ bargaining power.
Ukraine is undermining labor protections as the European Union strengthens legal obligations to promote collective bargaining, said Luke Cooper, an economist at the London School of Economics. Military and economic success depend on citizen support, and that effort will be hampered if workers feel their protections have been weakened and their wages reduced.
For supporters, however, the modifications were a much-needed overhaul of sclerotic and outdated Soviet-era rules. Old labor regulations, Mr. Gorodnichenko said, required employers to keep people on the payroll even if the entire factory was destroyed or the workers left the country months earlier.
“What we said in the report is not at all controversial in Ukraine,” he said. “The situation is so dire that something has to change.”
Timofy Milovanov, a professor at the Kyiv School of Economics and a former cabinet minister who also contributed to the center’s policy papers, said the push for deregulation was not driven by blind faith in the market economy, but by concerns that public institutions were not developed enough to cope with the task. .
He said he agreed with Mr. Stiglitz’s general criticism, but that many of the problems on the ground facing Ukraine were a far cry from theoretical discussions of government control and market deregulation. Ukraine is a “transitional economy” and a “teenage democracy,” he said. Severance payments or two months notice for layoffs are not relevant when companies are destroyed and need to be rebuilt, Mr. Milovanov said.
Incompetence and corruption plague both the private and public sectors, Mr. Milovanov admitted, and a balance must be struck to eradicate it. Ukraine’s National Anti-Corruption Bureau recently accused an investor and former lawmaker of offering a 22 million euro bribe to the mayor of Dnipro to win a contract to build the city’s metro system.
“The resilience of the Ukrainian economy will come from cooperation,” Mr. Milovanov said, “from market institutions and state institutions working together.”
The scale of the task is staggering. Ukraine recently drove out Russian forces, but the pace and destructiveness of Russian attacks on civilians and infrastructure has increased, with Moscow targeting power facilities, fuel depots and water lines. Some cities were almost destroyed, and the path of destruction was wide and deep across the country, affecting factories, homes, offices, telephone lines, hospitals, churches, warehouses, ports, railways and agricultural lands. The country’s gross domestic product is expected to fall by 45 percent this year, according to the World Bank.
Almost eight million people sought temporary refuge outside the country, while seven million were internally displaced. Education, social and health services will need to be rebuilt along with physical infrastructure.
Estimates of total costs have varied widely and are still being updated. During the summer, the Ukrainian Prime Minister estimated the cost of the reconstruction at 750 billion dollars. Every day that the war continues, that figure increases. Even if much of that cost is borne by other nations and global organizations, Ukraine is expected to accumulate heavy debts and will need a healthy economy once the fighting is over for a sustainable recovery.
“This is not achieved with much greater involvement of the private sector,” said Matteo Patrone, managing director for Eastern Europe and the Caucasus at the European Bank for Reconstruction and Development in Kyiv.
The development bank, which provides Ukraine with hundreds of millions of dollars in emergency loans, guarantees and donor grants, has a mandate to “encourage the transition to open market-oriented economies to promote private and entrepreneurial initiative.”
Despite this, Mr. Matteo remains optimistic. There is broad consensus on the general goals: Ukraine must be transformed into a modern democratic state and market economy with a strong judiciary and strict safeguards.
The industrial base has been destroyed, but Ukraine is oriented towards Europe and is attractive to Western investment. It has an educated population and a competitive advantage when it comes to agribusiness. And, Mr. Matteo added, “Ukraine has a strong and vibrant civil society.”
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