COMMENT: Ukraine isn’t going to be Poland

By bne IntelliNews May 26, 2015

Mark Adomanis in Philadelphia -

 

The Economist has been one of Poland's most fervent advocates these past years, constantly reminding the world of the genuinely amazing progress that the country has made since communism's shackles were removed.

And, truth be told, The Economist hasn't been alone. The World Bank, not exactly known as a place of over-the-top rhetoric, even went so far as to call Poland's recent run of economic growth a "golden age". Given the country’s troubled history of war, occupation and foreign domination, it seems a virtual certainty that Poles have never enjoyed a more prosperous and peaceful two decades.

Only the most churlish and irrational would try to deny Poland's progress. It is one of the few genuine instances of “convergence” between the EU’s old and new members, and represents an enormous gain in human welfare.

At the same time it would be an equally large mistake to think that Poland's recipe will be possible for others like Ukraine to replicate. And that is exactly the mistake that The Economist made in one of its most recent editorials. The “Ukraine as Poland” theory has also been bandied about by various EU functionaries, including many of the people instrumental in the development of the Brussels’ Eastern Partnership progamme that’s designed to help bring in former Soviet republics into the fold.

Poland’s reforms were genuine, but they were combined with an enormous program of US and EU assistance. As The Economist itself noted in another recent editorial, during the decade from 1990-2000 Poland cumulatively received foreign development aid that represented 42% of its 1990 GDP.

In other words, even if Ukraine is every bit as determined and efficient as Poland was in instituting difficult and complex economic reforms – and given the persistent dysfunction of the new government and the still-significant regional differences in public opinion there are very good reasons to believe that this will not prove to be the case – success will require a minimum of $56.6bn in Western aid (42% of Ukraine’s current nominal GDP).

However, basic demographics suggest that the bill for underwriting Ukrainian reform will actually prove quite a bit larger than was the case in Poland. As Poland was emerging from communism’s wreckage it was in the midst of several decades’ worth of natural population growth. The result was a workforce that was steadily, if slowly, growing in absolute terms. The sudden plunge in births after 1989 resulted in a workforce that was proportionally growing swiftly as a share of the total population. As the post-1989 generations gradually enter the labour force, Poland will experience significant challenges (its workforce has already peaked in relative terms and is about to start a protracted decline), but it enjoyed a “demographic dividend” during the most critical years of transition. Essentially, the demographics meant that Western aid to Poland encouraged a virtuous cycle of investment, development and growth. 

As I hope the graph (which traces the workforce dynamics in Poland from 1989-2003 and projections for Ukraine from 2014-2028) makes clear, Ukraine is in an entirely different situation. Its workforce is already shrinking in both absolute and relative terms.

During the 1990s Ukraine, incidentally, had workforce dynamics that were quite similar to Poland's. However, this chance, modest as it was, was totally squandered as the country's economy remained mired in corruption, bureaucracy and inefficiency.

The benefits of whatever "demographic dividend" Ukraine was going to reap are already in the past. And they won't be coming back. Every reputable demographic forecast predicts that Ukraine's labour force will continue to wither indefinitely into the future, putting increasingly large pressures on its already threadbare state finances.

Any bailout of Ukraine is therefore going to cost more than Poland’s and for less of an economic impact. Dependent on an ever-smaller numbers of productive workers and needing to care for an ever-larger number of retirees, the Ukrainian economy will have a lot less self-sustaining momentum.

When you take into account the demographic changes outlined above as well as the huge costs of rebuilding infrastructure destroyed in the Russia-stoked war in its industrial east, any effective Western bailout of Ukraine is going to be a lot bigger than the $56.6bn mentioned earlier. Estimates will vary, but an additional 25% seems like the minimum that would prove to overcome the substantially more adverse circumstances. Even higher costs seem probable. This would push the cost to a minimum of $70.75bn, a figure that is certainly not extraordinary when compared to Western outlays in Greece, but vastly larger than what the West has proven willing to invest so far.

Economic reform can, of course, succeed in making Ukraine more competitive than it is at the moment. But whatever chance Ukraine had to copy Poland’s happy trajectory was lost during the 1990s. We don’t have to rejoice at that prospect, but at the very least we ought to cease torturing the Ukrainians with promises that they will copy their neighbour’s trajectory, because that is not going to happen. 

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