41 Comments
Mar 23, 2022Liked by Noah Smith

Would Ukraine benefit from a Special Economic Zone centered on one of its cities, like China did adjacent to Hong Kong?

Creating a designated area and saying "export businesses and FDI especially welcome here" seems to help overcome both incumbent resistance to reforms (they can be isolated to a small area at first) and foreign investor nervousness (they can expect a critical mass of development-oriented services sooner if it's all happening in one area).

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this is brilliant, thanks!

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I feel like Stalker vs Witcher is a synecdoche for the Ukraine-Poland relationship. Ukraine had a medium hit with Stalker but didn’t really capitalise. Poland had the Wiitcher novels and parlayed them into a mega video game and TV empire.

Noah’s list is good but two more things Ukraine needs to sort out are land registry and pensions. Kiev is full of notaries because the land titles aren’t clear. And I think a well-audited Singapore style saving system could be good.

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Mar 23, 2022Liked by Noah Smith

I feel like any article about Ukraine‘s economic prospects w/o a mention of their (dismal) demographics, even before the war, esp. in comparison to Germany (and their influx of expellees and Gastarbeiter) and Japan is very incomplete.

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Re: Ukraine having a dictator, uh, Zelensky kinda has been squelching opposition parties. One hopes that will not last past the war, but it's something to watch out for. To be fair, some of the opposition parties are clearly pro-Russian, and even funded by Putin's regime. So it's not completely crazy to suspect them of being a potential fifth column. Assuming he survives the war, he may have enough popular support -- and enough allies in the legislature -- that he can pass a Park Chung-hee style agenda, for at least several years, through democratic means.

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What would you recommend they do to improve the rule of law, reduce corruption and flatten the oligarchs?

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One thing I missed from looking at what Ukraine (UA) was good at before the war: outsourcing software development. UA more or less was and is the extended workbench for many IT companies of all sizes in central Europe and the UA universities were "producing" more IT experts every single day. There was a rough estimate that the running cost of IT expert service fees in the UA was 11% of what a counterpart in France, Germany, Netherlands and the likes would cost. This is actually interesting since UA was the "go to" place when IT expert cost in Poland was considered too high and you compare Poland and UA a lot in your article.

This is an area that can swing back immediately after the war ends and I have some insight that it's still working in an amazing way.

Another point to look at is that UA was producing both agriculture produce and contributing to value chains e.g. in automotive and we hear today that lacking that is very disruptive and UA is a very important supplier that is hard to replace.

Normally this would indicate that UA companies were in a good market situation and should therefore gain in terms of GDP. On the other hand right before the war there was consensus that the UA economy and especially the public sector was in an awful state which doesn't correlate with being in a good market situation. There are several voices from people in the UA that value the way today's UA government is standing strong during the war but remind that UA was nearly a failed state before.

This would mean that before we start any money injection and investment initiatives there should be a convincing analysis where the money was going down the drain before (Oligarchs? corruption?) and only then it makes sense. Otherwise the initiatives won't reach the broader population but only some deep pockets.

To make matters worse many companies these days are reluctant to invest in UA because they feel that doing business there might be a struggle when you as a company adhere to strict Corp. Governance rules and stay miles away from areas with corruption.

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Wasn't South Korea's success also largely driven by the absolutely mammoth US military aid that was provided? I seem to recall that US military aid to South Korea was something like 5x all foreign aid to all of Africa combined in the 20th century.

What would a comparable amount of US aid in 2022 be?

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I really enjoyed learning about Poland and South Korea's economies.

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When reading this, I initially thought 'this is premature', but Noah is right - it's useful to think about this now. Besides, it's the best way for economists to contribute. Well, non-Ukrainian economists at least.

The South Korean path sounds to me rather risky at Ukraine's current state. It can devolve into the state being forced to support a few failing 'champions' held by favored oligarchs - socialized risk, private gain. We saw in Russia itself the risks of a premature ambitious economic plan before rule of law. Also, when SK did this, this was less competition since, well, fewer countries knew this path was possible.

I don't think security would be a big problem for the Poland/FDI path. Even today Western Ukraine is relatively safe; and even the Kremlin in its dreams had considered giving up on Western Ukraine and ceding it to Poland or a rump state. I think there's a bigger risk of the foreign companies being unaccountable and acting as oligarchs/colonists. There are quite a few complaints in E. Europe about German car manufacturers. I wonder what could be done in EU level to mitigate that?

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Very nice and concise piece about comapring the Polish and SK way of development.

The two things I was missing in the comparision with Poland is:

1, Initial FDI in CEE countries were based on the capital scarcity after 45 years of communism and Soviet Union and liberalization+privatization based on the Washington consensus in the 1990s, and further accelerated by EU membership from 2004. This inflow by the way came to a massive halt after the 2008 crisis and only restarted in mid 2010s. Ukraine in contrast does not seem to be accepted soon into the EU, rather being left in a Turkey type of limbo - since I assume the EU does not want direct conflict with Russia.

2, Even though initially CEE (especially Visegrad countries) were also not part of the customs union, they were close enough, say a 6 hour drive with good infrastructure to the West. Ukraine, although being 2 hours flight away from Berlin is far far away on road also. Lviv from Budapest (which is by far not the centre of Western Europe) is a 10 hour drive. Railways would be a solution, Ukraine has a nice network, but they have Russian gauge railways, meaning far more planning for international shipping of goods once they aim to connect into the European trade network with logistical centers at the borders and massive investments in alternative shipping forms. Seaways could be a solution, but only if they retain Odessa. So there are huge obstacles before market access and integration.

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Solid perspective. I think it starts and ends with joining the EU and NATO, as it was is Poland. Reality after a war FDI will not flood in until security is garunteed, i.e. NATO. After that, specilization as you mention with Poland will filter in and wealth and prosperity will grow.

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I think one huge impediment to future Ukrainian prosperity that you didn't mention is demographics. Before the war, Ukraine had already lost a staggering eight million people since the breakup of the Soviet Union, largely due to mass emigration. Ukraine also has an extremely low birth rate, even lower than Poland's, which could make it difficult to replicate its success, let alone South Korea's which had a rapidly growing population during its economic miracle. The current refugee crisis will only worsen Ukraine's demographic woes. The potential for a breakthrough unfortunately seems bleak to me, unless they can join the EU or something.

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If Ukraine joins the EU it is going to experience a huge brain drain. It is actually hard to understand why they want it so much.

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Why not use all the Russian reserves blocked by the West and held in Western banks as reparations to rebuild everything the Russians blew up for starters?

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