Economic development of Ukraine in modern conditions

January 7, 2020 5:24 pm

Andriy Stavitsky – tutor of MBA program of Edinburgh Business School in Ukraine, Doctor of Economics, Associate Professor of Taras Shevchenko National University of Kyiv

For several decades Ukraine has not been able to develop a single economic policy that would have been able to be implemented over a long period of time. Indeed, almost every new government declares entirely new goals for economic development. Not surprisingly, the formation of governments has almost always taken into account certain interests designed to provide the greatest assistance to either certain businesses or sectors of the economy. The results of such a policy are quite well known: Ukraine is traditionally in Europe lags behind  in wages and living standards. What to expect in our country today?

Production of goods and services is one of the main indicators of economic results in the country. However, the question remains who should consume everything that is produced within the state’s economy? As you may know, the general issue is divided into several categories:

  1. consumption by people themselves
  2. general investments into opening of new businesses and modernization of existing ones
  3. public expenditures aimed at infrastructure development, military and social protection of the population
  4. net exports of goods and services (the difference between total exports and total imports).

In the modern world, all these components are very closely intertwined, because of a significant interconnections between macroeconomic variables. If in Soviet times the main focus was on public expenditures, investments in enterprises of a certain type and then, after the declaration of independent Ukraine, the export model of the economy was chosen. It envisaged the development of export sectors of the economy, the growth of which was to become a locomotive for other areas.

In the late 1990s, it was possible to stabilize the economy on the basis of above mentioned model, with the excess of exports over imports, which on the one hand allowed to maintain a satisfactory state of gold and foreign exchange reserves and more or less stable currency, but significantly increased inflation. Keeping the hryvnia stable in the face of constant inflationary pressure was extremely difficult, which is why a logical extension of the model was the currency crises and currency devaluation of 1998, 2008. Another devaluation was supposed to take place in 2013, but the government did not decide on it at the time, which resulted in quite severe consequences in 2014, when it had to be waged in a war and the loss of almost a fifth of the industry.

The events of that time forced to abandon once and for all the economic model that is oriented towards export of products, and thus also to the protection of individual industries or enterprises. Obviously, the transition to inflation targeting in 2014 cemented a different paradigm in which the exchange rate is the one that balances incoming and outgoing financial flows. It is not easy to say that the transition was easy, but today we can say that it is over and there will be no refusal. This situation has led to an interesting consequence: with a constant decrease in inflation, restrictive monetary policy, the return on assets in national currency has become significantly more attractive compared to foreign assets, which has contributed to attracting significant investments in our country. First of all, they were focused on the most risk-free operations – the purchase of domestic government bonds. Over $ 4 billion of government bonds was purchased in 2019. USA. However, this does not mean that it is only speculative capital. Investments in production and construction were also made, as evidenced by the balance of payments of Ukraine. Also, an important role in the flow of currency to the country was played by transfers from workers to the amount of about $ 12 billion. USA.

In such circumstances, an incredible hryvnia was revalued. However, it should be understood that this model has its weaknesses. In particular, the inflow of speculative investments has already led to a significant fall in the yield of domestic government bonds, which reduces the interest in buying them. Obviously, the trend will continue now, but falling below 6-8% depending on different conditions will actually stop the new inflow of currency. In turn, increasing the purchasing power of citizens due to the appreciation of the hryvnia will reduce labor migration, which will not allow to count on additional foreign currency funds from foreign transfers. Finally, enterprise investment will remain the sole source of growth through a focus on overall investment. Of course, both the government and the NBU are currently considering the risks of external shocks, which can sharply limit the inflow of new investments, however, given the stability in the world markets, the current model will be still dominant.

However, this will only lead to the need to switch to another model, namely to stimulate domestic consumption, since only this resource can enable both long-term and sustainable growth, in fact, independent of external factors. It requires the construction of a human-centered model of development, in which each individual is of greatest value to the economy. It is obvious that the quality of human capital will play a paramount role in the new economy, it will be a major driver of economic prosperity. At the same time there will be a significant reorientation of the human role in the production of goods and services. As wages will have to rise, it will be more advantageous for entrepreneurs, at some stage, to replace low-skilled jobs with workplaces or vending machines, to transfer some or all of their activities to IT-processing, which will lead to possible unemployment among the least educated. This process will actually be fast enough and will take 10-20 years. 

The concept of Industry 4.0 will be implemented almost everywhere. In such circumstances, the demand for real education, provided by the concept of Innovative University 4.0, will strive for quality, not mass education.

Students of Edinburgh Business School study economics factors in the Economics for Business Purpose course. Ignoring these laws, it will not be possible to predict changes in the market, evaluate the strength of competitors, it will be difficult to efficiently allocate resources.

The materials are developed by international experts and are studied by all students of MBA program at Heriot-Watt University in the world.

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