EBRD 2023: Will post-war Ukraine look like Japan or like Iraq?

EBRD 2023: Will post-war Ukraine look like Japan or like Iraq?
War damage in Mariupol. / bne IntelliNews
By Clare Nuttall in Samarkand May 17, 2023

While there is no end in sight yet to the war in Ukraine, attention has already turned to the post-war reconstruction of the country. This will take years, as Russian attacks have destroyed critical infrastructure and millions of Ukrainians have left their country. A reconstruction that works well could see the country emerge as a high-tech success story, as Japan did after the Second World War, but history shows many more countries struggle to regain lost ground years after a conflict ends. 

New research published by the European Bank for Reconstruction and Development (EBRD) finds that a rapid recovery is not the norm for economies emerging from armed conflicts and few fully recover to their pre-war level of income per capita, even in the long term.

According to the EBRD’s Regional Economic Prospects report, just 29% of economies manage to reach their pre-war level of GDP per capita within five years. 

Moreover, few of the economies assessed by the development bank experience 25 years of peace following a conflict. 

The EBRD compared countries at war to countries with similar population size, income per capita and economic growth at the start of the conflict to assess the progress of reconstruction. 

“Tragically during wars many people lose their lives but we also see population growth slows after a war … countries don’t catch up with the trend in their population size for at least five years after the war is over,” Beata Javorkik, EBRD chief economist, told a panel at the EBRD’s annual meeting and business forum in Samarkand on May 16. 

“Capital stock gets destroyed during wartime. On the one hand destruction of the capital stock makes countries poorer, but on the other hand the fact they are not locked into existing technology means countries can leapfrog. Having said that, countries do not on average catch up with the pre-war trend five years after the war is over.” 

Similarly, half of the countries assessed did not return to the income per capital trend — as achieved by the control group — even a quarter of a century later. 

Harold James, professor of history at Princeton University, told the same panel that there are enormous differences among post-war economies. “There are cases where there’s a long malaise after wars, particularly lost wars, but there are also cases where there were rapid bounce backs including, for instance, by Japan and Germany.” 

He argued that the post-war reconstruction might be a chance for Ukraine to catch up with richer post-socialist countries such as Poland. 

“If you think of the background to 2022, one of the striking features is that Ukraine since the collapse of the Soviet Union has not been a very effective economic performer, compared to Russia or Poland, which has really soared ahead. Ukrainians look at that with some kind of envy, because in 1990 the GDP per head was roughly the same in Poland, what became the Russian Federation and Ukraine,” James said. “There is immense potential, in terms of the human capital, for Ukraine to catch up with what Poland has done. That looks like the kind of post-1945 boom Europeans countries had.” 

What post-war Ukraine needs

The cost of the reconstruction has already been estimated at several hundred billion dollars. 

Noting that the war in Ukraine is the largest conflict in Europe since the Second World War, Fiona Hill, senior fellow, foreign policy, at The Brookings Institution, said: “At the end of this war Ukraine is going to look very different from in 1991 when it regained independence, and 2021, a year before the outbreak of this war. We are going to see demographic impact, destruction of critical infrastructure. We are going to have to build forward.” 

“First it will be a question of how the war ends,” said Peter Frankopan, professor of global history at Oxford University. He argued that recoveries are very hard to model against previous wars and there is “no quick fix”. However, he and other panellists pointed to reasons to be hopeful, notably Ukraine’s nuclear power capacity, its large agricultural sector and IT expertise.

Nonetheless, achieving a five-year recovery would necessitate additional investments of approximately $50bn per year from foreign capital inflows, including private investments, according to the EBRD report.

For Ukraine to achieve recovery within a five-year timeframe, its economy would need to grow by an annual rate of 14% throughout that period. This level of growth would raise the average GDP from around $150bn in 2022 to $225bn in constant prices, the EBRD projected. 

Javorkik outlined the challenges to Ukraine’s post-war recovery, including the fall in population, the loss of capital stock and increase in debt. However, she added: “Probably most important is finding a stable solution to the conflict. Peace tends to be elusive. Wars between states are frequently followed by another war.” Indeed the report shows that only in 20% of cases did peace last for 25 or more years after an armed conflict.

Another issue is how funding is used. "Money matters, but when it comes to what determines success, availability of funding explains only 10% of the return to prosperity. There were massive amounts of money for Afghanistan and Iraq, but not much happened. We also need to think about how to use external funding effectively,” said Javorcik. 

Doubling Ukraine's investment levels as a share of GDP would necessitate a substantial increase in the country's absorption capacity, including the establishment of governance structures required for designing and contracting complex projects, said the EBRD report.

The EBRD report also highlighted the importance of striking the right balance between private-sector and public-sector participation, along with the crucial role played by external assistance from bilateral and multilateral agencies, in earlier post-conflict reconstructions.