Guest blog by Dmytro Lyvch, LEG ’23
As you may probably know, Ukraine is now facing one of the biggest challenges of the decade – full scale war that has its dramatic outcomes for the society and economy of Ukraine (GDP has dropped by 29% in 2022; total damages and losses accounted for ca USD 400 bn according to RDNA2 by WBG). Dedicated to Ukraine’s economic development and growth, I see the need to focus on Ukraine’s post-war recovery and European integration. Closely interconnected, these two processes will allow Ukrainian professionals to bring about prosperity to our country. In case of proper understanding of the Ukrainian development path, the synergetic and mutually beneficial effect of the development of all regions may lead to a balanced economy, and cohesive society.
Throughout the course I was able to focus on better understanding and practical steps for working on the following growth challenge: “How post-war recovery and EU integration will reshape economic geography and complexity of Ukraine”. What I also valued a lot is group discussions which brought dynamics to our cross-country discussions which were aligned across our growth challenges and problems. My growth problem associated with the growth challenge was the following: “Insufficiently low rates of projected GDP growth rates in Ukraine for the purpose of a fast and efficient recovery as well as further competitiveness on the EU and other markets” as well as practically applied the methods and approaches suggested during the program. In particular:
- Complicated and complex problems. I learned how to define complicated and complex problems. The one that I specified is a complex one, there is too much uncertainty due to the ongoing war, which leads to the absence of a clear view of the problem solution. This economic problem also includes different dimensions, such as international (related to EU integration and macro-financial support and other sources of funding of post-war recovery), national (economic recovery and development in general), and regional (reduction of disparities and better specialization based on relative competitive advantages and identified collective know-how).
- SLDC vs PDIA strategies. If you ask me to name the top thing I learnt in the course and which now helps me in solving work cases on a daily basis – this is the PDIA approach. I already applied the knowledge taken in the course on developing one of the regional strategies and will continue applying it on other economic development projects. For the growth problem that I specified, I would suggest having a mixed solution between an SLDC and PDIA approach. That means, using SLDC to streamline recovery efforts on the national level is appropriate as it’s a time of a crisis created by the full-scale war in Ukraine. On the other hand, the PDIA approach is considered to be the best option for implementing the change on the regional level especially taking into account success of the decentralization reform (started in 2015) and increased role of local communities who should benefit the most from the post-war recovery and EU integration.
- Diversity of knowhow. I haven’t focused my thoughts on this point before I learnt about it in the course. Ukraine lacks the needed know-how, investments in technology, and appropriate financing that would drive domestic production towards more complex or ‘sophisticated’ goods being manufactured and exported. Together with the groupmates in the course we identified that the scrabble theory of economic development is very useful to build a strong narrative (societies know more when they know different). Additionally, I also agreed with the group that moving brains is easier than moving knowhow into brains. I believe that “moving brains” into Ukraine will help to attract and retain collective knowhow.
- Binding constraints vs longlist of reforms. Key takeaway from the learning process in relation to the selected growth challenge would be that one strategy may not fit all. That is why sometimes no-brainer reform or initiatives may result in unexpected outcomes if they are not focused on identification and further mitigation of a binding constraint. Given the fact that my work is focused on a growth challenge of insufficient projected GDP growth rates for the fast and efficient recovery, further implications of a growth diagnostics and identification of binding constraints seems to be a very feasible option. Ukraine’s GDP per capita growth trajectory has been historically lower than in CEE countries (for example, Poland) and heavily affected by external shocks (full-scale war, COVID). Thus, right after the Revolution of Dignity in 2014 a very broad reform agenda (around 60 reforms launched) followed by development of many strategic documents and plans. This might be considered as an adequate approach for a transition economy and some of the reforms led to positive outcomes (for example, decentralization, deregulation, etc.), but at the same time investment and exports continued to be insufficient to boost economic growth. This may be explained by a few factors: (1) lack of coordination especially in the areas where PDIA approach is crucial, (2) relatively slow pace of implementation for some reforms due to broader agenda and limited institutional capacity / resources, (3) targeting high-level symptoms rather than root causes of the problem. Currently, I would apply a blended solution for the recovery and development that includes: (1) reform agenda within EU integration efforts of Ukraine aimed at harmonization of legislation to to EU acquis which is necessary, (2) targeted interventions as a reaction to identified binding constraints in the areas of investment attraction, export diversification, economic geography focused on an increase of economic complexity, and return migration for accumulation of knowhow and contribution to consumption as a GDP component.
- Crawling design space. Overall I found it very useful to deep dive into particular areas of the growth problem in search of potential solutions by looking at 4 dimensions: (1) existing practice, (2) latent practice, (3) external best practice, and (4) positive deviance. Piloting this approach has helped a lot in terms of structuring my thought around the idea of bringing export-catalyzing FDIs on the regional level to diversify the local economy and increase its competitiveness. This approach combined with organization of task forces may be replicated in other areas as well.
To dive deeper into the root-causes of the growth challenge and problem, I outlined a fishbone diagram and identified potential immediate policy actions. During the 10-week learning process my fishbone diagram faced some minor changes in order to better differentiate pre-war structural economic problems and war-time economic challenges:
- As for pre-war period, low-pace growth trajectory may be explained by three major causes: (1) lack of FDIs into secondary sectors of economy caused by low risk-return levels and low project development capacity (hypothesis proved during field visits) that resulted in commodity-driven economy (average FDI attracted is USD 5-8 bn vs USD 14-16 bn of remittances that are typically boosting high consumption levels, (2) relatively low export values and imbalanced product space with a focus on raw materials and semi-processed goods caused by inexisting sectoral policies and poor export support infrastructure, (3) poor economic diversification with a focus on industrially developed South and East parts of Ukraine caused by rather weak smart specialization efforts on the regional level.
- As for war-time challenges, the major focus will be on the consumption side since there is a high number of forced migrants (ca 6 mn) and production side with a focus on better reintegration of socially vulnerable groups (internally displaced people, war veterans, etc.) because of a mismatch of available jobs and expertise on a labor market proved by price signals (average salary increase in combination with high unemployment rates).
As an immediate action, I would focus on two major dimensions: (1) economic geography (actualization of regional recovery and development strategies) supported by identification of areas that are aimed at export-catalyzing FDI attraction (export / product diversification) to relatively safe regions (West / Central) in combination with a better utilization of newly emerged collective know-how due to large number of relocated enterprises and IDPs from the frontline regions (Eastern / Southern) – for that project development and absorption capacity should be improved and sufficient investment guaranties / war insurance mechanisms designed and implemented, (2) human capital development through streamlined government activities on return migration to support economic growth; better engagement of diaspora to contribute to collective knowhow creation; and reintegration of socially vulnerable groups by bringing new approaches, matching skills with available jobs and creation of new jobs in sectors of higher economic complexity.
After this course, I continue working in the public policy advisory and as a think-tanker on the topic described striving to facilitate positive change and build lasting and sustainable solutions for it. I plan to use evidence-based policy-making and promote post-war recovery on international, national, and regional levels. In the mid-term, I would like to continue driving the private sector development, and in the mid to long term – share Ukraine’s experience with other countries, as well as contribute to youth development through teaching and experience sharing.
This is a blog series written by the alumni of the Leading Economic Growth Executive Education Program at the Harvard Kennedy School. 58 Participants successfully completed this 10-week online course in December 2023. These are their learning journey stories.