The bizarre recent phone conversation between the president of the US and his counterpart in Ukraine returned to the public mind a neglected country with a frozen conflict.
When the Soviet Union fell in 1991, per capita gross domestic product was slightly higher in Ukraine (at purchasing-power parities) than in the neighbouring Soviet satellite Poland. Now Poland’s GDP per capita is over three times as high—3.4 times to be precise. This though Ukraine has better climate and soil and more mineral deposits, and in 1991 it had a stronger industrial base and lower public debt than Poland.
Many internal problems have contributed to Ukraine’s decline, including misguided economic policies, corruption and failed privatisation. In 2017 the total net worth of Ukraine’s three richest individuals comprised more than 6 per cent of Ukraine’s GDP, more than three times the proportion in Poland.
There are limited economics opportunities for a large share of Ukraine’s human capital. In 1992 Ukraine had about 52 million people—there are 42 million left. In contrast Poland’s population has remained stable at about 38 million. At the current growth rate, according to the World Bank, it will take Ukraine about 50 years to reach the income levels of Poland and almost 100 years to reach those of Germany. Who can afford to wait so long?
External forces
In addition to internal challenges, however, Ukraine is also affected by external forces, as highlighted by the recent phone conversation between the newish Ukrainian president, Volodymr Zelensky, and the president of the United States, Donald Trump. During it Trump requested an investigation of the former US vice-president, Joe Biden—a nominee for the Democratic presidential candidacy in 2020—and his son.
Obviously Ukraine is in a vulnerable position, because it needs from the US not only continued bilateral financial support but also support at international organisations such as the International Monetary Fund and the World Bank, headquartered in Washington DC. The World Bank estimates those needs to be about US$11 billion dollars per year, just to repay Ukraine’s public debt and finance its deficit in 2019, 2020 and 2021. Ukraine needs continued IMF support after its stand-by arrangement runs out in March 2020.
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The presidents agreed during their conversation that the EU was not doing much to help Ukraine. Trump said: ‘Angela Merkel she talks Ukraine, but she doesn’t do anything.’
Ukraine has been affected by external forces before. With the Budapest Memorandum in 1994, it agreed to eliminate all nuclear weapons in exchange for respect of its independence and sovereignty and its existing borders. Russia, the US and the UK were all signatories of the agreement.
The trouble with Russia began with the declaration issued by the heads of state and government after the North Atlantic Council in Bucharest in 2008:
NATO welcomes Ukraine’s and Georgia’s Euro-Atlantic aspirations for membership in NATO. We agreed today that these countries will become members of NATO. Both nations have made valuable contributions to Alliance operations.
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It was clear that this would not be acceptable to Russia and it eventually resulted in the invasions of Georgia in 2008 and Ukraine in 2014. Russia knows well that NATO and the EU are unlikely to admit countries if their borders are disputed—and it acted accordingly.
Pressure lacking
But what are the options for Ukraine now? There does not seem to be much pressure from outside forces to help. The EU benefits form the flow of mostly young and skilled people from Ukraine, amounting to about 10 million since 1991. The populations of western-European countries are ageing. Many Ukrainians leave for Poland, perhaps on the way to a Germany which needs skilled workers for its industry and where the pay is good.
Ukraine is not of strategic importance to the US, which is increasingly preoccupied with Asia because of the rise of China and the middle east because of oil. EU sanctions hurt Russia but the latter seems unlikely to accept further integration of Ukraine into the west. Geographically Ukraine is perhaps as important for Russia as Canada or Mexico for the US—what would the US do if Russia or China formed a military alliance with those countries?
In the meantime, Ukraine is stuck in a crisis. In a low-growth scenario more and more people in eastern Ukraine may want to join Russia, already with a much higher per capita income. An increasing number in western Ukraine could meanwhile see continuing benefits in migrating to the EU. The risk is that an already divided country will formally split into two.
Should Ukraine be an independent state, between the EU and Russia, not seeking formal EU and NATO membership? It could co-operate with and receive increased financial assistance from the EU, the US, the IMF and the World Bank, also under the condition that Russia would respect Ukraine’s territorial integrity.
In that scenario, Ukraine could possibly have some peace to grow and reach its economic potential. But whatever scenario is chosen it needs to have the ownership of the Ukrainian people, not only outside forces. In spite of divisions, most Ukrainians want to keep the country together.
Hilmar Þór Hilmarsson is a professor of economics at the University of Akureyri, Iceland and has held numerous visiting scholarships, including at the University of Cambridge in 2017 and 2018. He served as a specialist and co-ordinator with the World Bank Group in Washington DC from 1990 to 1995, at the World Bank office in Riga from 1999 to 2003 and in its Hanoi office from 2003 to 2006.
