Economic strategies and forecasts are one of the prime products of the Ukrainian Institute for the Future. And it’s no wonder as a majority of the Institute’s founders are businessmen interested in the economic development of Ukraine. Co-founder of the Institute and director of economic programs Anatolii Amelin reveals details of Ukraine’s groundbreaking strategy for economic development in the making now and up to 2030.
— The development strategy of Ukraine being developed by the Institute suggests a growth of nominal GDP by up to 1 trillion USD in 2030. Currently, the annual GDP is 130 billion USD. So how does one achieve such an ambitious goal?
— We set a task – to generate 1 trillion USD in nominal GDP by 2030. Realistically, we could have set the goal as half that, or twice the amount. The point was to have a goal that is measurable and achievable. The first goal — 1 trillion USD, is it possible? According to our research the goal is in fact achievable and we have since determined the factors that may affect is realisation.
The four key factors which influence the economy development are as follows: investment, net export, consumption, and public expenses. Another critical question relates to whether or not an increase in labour productivity by tenfold is possible within the next 10-year period. In the classic sectors of the economy, the answer is no, unfortunately. At a metallurgical plant, for example, one could increase productivity by two to three times, but not by ten. What we are talking about here is a radical change of the economic structure. Today, Ukraine’s economy is resource-based. More than half of the economy is as a result of export, 80% of which is resource-based.
In order to achieve the goal I’m talking about, we need to have at least 60% of the Ukrainian economy coming from new sectors, which include high-tech and IT. Even according to this format, the classic economic sectors will grow only about three times in monetary terms by the year 2030. However, key contributions into economic development will be as a result of new technology, new products. This is of critical importance. Without them, Ukraine will never become an economic or political entity with any influence in these areas.
— What is the potential of IT to further development? Is IT the new sector?
— I did not say IT only, I said high-tech and IT. The thing is that after a while, IT will itself be transformed. In Ukraine today, nearly 120 000 people are involved into this sector, and in 2020 we expect that number to rise to 200 000. In other words, the trend is stunningly good. But we do understand that algorithms can quietly replace people to perform simple tasks. And even today, in India, people are laid off in sectors where they are economically unprofitable.
High-tech is a point of growth for Ukraine. We have an economy with reasonably good innovativeness. Indeed, our Academy of Science is antiquated, but, as I am involved in venture capital, let me give a few examples. There is groundbreaking technology recently found in the depths of the Academy of Science, in which we invested, and the high-tech products from which were sold to Australia, Japan, Great Britain, and Germany.
Our production facility remains in the occupied territory of Donetsk, but I can say that we still have high-profile clients. Our most high-profile client is Rio Tinto — the biggest mining company in the world, for which we created unique equipment for the enrichment of iron ore by cryomagnetic separation. They bought the equipment from us because there were no other innovations such as ours anywhere else in the world.
We developed equipment for detecting breast cancer in its early stages. Again, this development is ours. The suitcase-sized compact set of equipment cost 3 000 USD, and with it you can travel to a small village and do a mass screening. It’s cheap, quick, efficient, and completely safe. We have not seen a comparable foreign product anywhere, and those that are similar cost almost 10 times more. Not to mention they are larger and not as mobile.
We have worked with nano-titanium and nano-aluminum, we have learned how to strengthen already-strong medical and military titanium, which reduces the metal content of the manufactured elements of prostheses and equipment.
These are all Ukrainian developments. In fact, there is a huge number of them. So what’s the problem? Science in Ukraine is isolated, education is isolated, and business is isolated. And what does this mean? Either business copies technology or buys abroad. We do not have the demand for proficient engineering experts. My first degree is in engineering — I’m a metallurgical equipment engineer, but I have not worked a single day as such. And today, the shortage of personnel is huge. Try finding engineering experts in Mariupol. Nobody wants to work there. We have lost them. Only when we unite science, education, and business, will we regain innovation. Just like in the example of Silicon Valley. The first investors were teachers who invested in the development of their students, and as a result the standard of living in San-Francisco is one of the highest in the world.
— Last year in December, the Institute presented an interactive model of the Ukrainian economy. How can it be of use to business?
— In fact, this model was created more for politicians and officials — those who make decisions concerning the future of Ukraine, not for business. We see a lot of populist ideas, put forward by politicians, ministers, even the prime minister, presidential candidates. Most of these people are unable to assess the consequences of the decisions they make for the economy, business, or the quality of life.
We worked on an economic model together with experts of a German institute who created similar models for two regions of Germany. The model is actually quite complicated, which takes into account dozens of interrelated factors affecting the development of economic processes.
In particular, the key factor for us is the assessment of impact different decisions have on GDP: the impact on the economy where fiscal burdens are concerned, the volume of investment, employment, changes in the budget structure. In other words, it is important for us to understand whether the amount of business will grow or fall. It also has an influence on the growth of income on the population. After all, the ultimate beneficiary of all the research carried out by our Institute are the citizens of Ukraine.
Thus, the model allows to track how the assertions of politicians, such as “we will lower gas prices by two times”, will impact the economy. Moreover, we even published a research paper which showed that this would lead to a situation where, taking into account the subsidy system for households, nothing would change, other than money would be taken from the largest gas companies. Over time, production would fall and Ukraine would import more, and as a result the country would be more dependent on gas imports. The domestic currency would be weaker because the need for imports would grow, and the trade deficit would increase, which would decrease the solvency of Ukrainians.
For business, the most likely benefit is the model which tests the effects of government decisions. Will the economy get bigger or smaller? Effective demand will grow or shrink. After all, my business and sales depend not only on the solvency of people and business, but also their aptitude to use my services and products. As such, the most important factor for business is to monitor how this or that decision will affect the economy of Ukraine in the long-term. And if there is growth, then, accordingly, the potential domestic market may expand, which may affect the incomes of my business and its capitalisation.
— You mentioned that risks in Ukraine often outweigh the benefits for foreign investors. What risks do you consider key?
— Risk is the probability of an occurrence of an event. That is, it works with certainties and uncertainties. Uncertainty #1 is the absence of a country’s development strategy. In this case, no-one knows where the country is going: not local businesses and certainly not the foreign investor who is trying to understand where to put his money. If he goes to Turkey, he understands which sectors are a priority. My long-time client owned a factory in Donetsk before the war, which employed 500. Today, the same factory operates in the free economic zone of Izmir, Turkey, where 50 people are employed, as many processes are automated. This business owner pays no income tax or taxes on wage. This is an example of systemic industrial policy.
The second risk group is the lack of effective protection of private property: not everyone is equal before the court and private property is not considered “sacred”. In this regard, law enforcement does not fully perform the required functions.
The third risk is excessive regulation of the Ukrainian economy. Unfortunately, we do not have a country that we built from scratch, which includes efficient business processes with the functionality we might come to expect from important institutions. We have old Soviet institutions that are lightly chartered. In our country, taxes are tool for financing the state apparatus, as opposed to payment for the service function of this apparatus.
Therefore, we need to press the restart button on all institutions where operating goals and business processes are concerned. This refers to the actualisation of tasks and reduction of unnecessary ones, an automation of business processes and decisions, and a decrease in the number of civil servants to a possible minimum with the hiring of professional highly-paid motivated specialists.
As part of the economic development strategy up to 2030, we are modelling improvements in the quality of management, increasing the cost of public service in nominal terms. But with the growth of the economy as a whole the share of expenditures on government with regard to GDP will decline in proportion to the fiscal burden.
In particular, by the year 2030, in the case of our model, the overall fiscal burden on Ukrainian business will decrease by two times. This will be a good option for international businesses looking to develop in Ukraine.
— The agricultural sector is often cited among the development priorities of Ukraine. How realistic is this in your opinion?
— Over the next 10 years, the world’s population will increase by 1 billion people. People want to eat. At the same time the middle class will grow, which will be about 40% of the total population of the planet. The middle class prefers high-quality organic products. Ukraine could become an important supplier of organic products to the world market. But this does not mean that it will be the only or the most important sector of the Ukrainian economy. According to our forecasts, by 2030, the agrarian sector will grow at least three times compared to today. Growth will be tangible, but within the framework of the entire Ukrainian economy it will be inferior to the sectors of the new economy and this is logical.
— What is the importance of geographical location and energy for strategy implementation?
— Two branches of the silk road pass through Ukraine: one through the temporarily occupied territories, the second through the Black Sea. This is not the cheapest branch, but if we want to participate in global transactions we must start looking at projects related to infrastructure. According to our Institute, Ukraine could attract at least 20 billion USD into the construction of new ports, transport aviation hubs, new roads and high-speed railway lines. The Baltic-Black Sea corridor also passes through Ukraine. Today, it is a system of rivers that create good conditions for the most inexpensive logistics. But by and large the Baltic-Black Sea corridor connects the Scandinavian countries through Ukraine with Turkey, Iran, Pakistan, and India. India is one of the fastest growing markets in the world.
And if Ukraine is located at the intersection of two global corridors, then this is a good option for placing not only logistics hubs, but also production facilities.
The cost of labour with regards the organisation of production in the near future will not matter. If I have five people working at my enterprise, what does it matter where I place production or what the cost of labour is? I can put the company in Belgium, I can put it in Ukraine, it does not matter. There are two factors that will influence the choice of jurisdiction: fiscal burden and logistical leverage to the main markets. Located at the crossroads of global logistics corridors, Ukraine will have a very advantageous position for locating and localising production. It is also important to create a fiscal policy and protection of private property in order to make it profitable for investors to locate production here. And Ukraine will become part of the European infrastructure community.
Though ranked second in Europe in terms of gas reserves, today, Ukraine continues to be energy. Think about this: Ukraine imports gas at 3.5 billion USD annually. Wouldn’t it be logical to invest in our own gas production? According to our estimates, a 3 billion USD investment in gas alone would be enough to provide Ukraine with its own resources. That is, the amount we pay annually for imports would be enough set up and extract the gas ourselves.
If Nord Stream 2 starts working by 2021, the Ukrainian pipeline will “dry out”. This results in both crisis and opportunity. If we forecast the development of this sector correctly, according to assessments made by our Institute, Ukraine could take up to 10% of the European gas market in the next seven to eight years. And the gas market, according to research of American institutes, will continue to grow until 2050. Demand on gas is growing, whether we like it or not. Ukraine can become a powerful energy engineering player in Europe, and above all load our own pipeline, as this is one of the most powerful infrastructure elements of energy security in Europe.
We also conducted a study on the future of oil. In fact, the goal was not so much to understand the future of oil as the influence of technology on the future energy market. We see that within the next 10 years, the demand for oil will remain, with no sharp change in the balance of supply and demand. But Ukraine is, again, dependent on imports of petroleum products. We import petroleum products worth more than we import gas: gas at 3.5 billion USD and petroleum products at 4.5 billion USD, which constitutes 60% of the needs of Ukraine. This is a serious systemic risk for the Ukrainian economy. At the same time, the explored oil reserves in Ukraine exceed 200 million tons. This is also a good opportunity for development. I’m not talking about exports, I’m talking about self-sufficiency of the Ukrainian economy, a fairly large market, with our own resources.
In the next five years, nuclear power units without an extension resource will begin to fail. Ukraine could become an importer of electrical energy. And if we start renovating generating capacities correctly, Ukraine could, among other things, become an exporter. The question is in formulation of the problem and setting a plan to achieve it.
We also need to synchronise our energy system with Europe. We need to invest in the construction of several nuclear power units. The Institute did research on this topic, and according to our estimates, we could provide Ukrainian electricity to 5% of the European market in the future,
— The Institute’s vision of the future is quite optimistic, not dissimilar to predictions of futurologists…
— I will say straight away that the future cannot be predicted, but it can be designed. We all work with it regularly, starting from making wishes, ending with clear business plans. This is nothing more than a choice of one of the scenarios from a group of scenarios that will be most successful for us.
The result will depend on the ambition of the goal. Ukraine, today, is a field of opportunity and whoever is sees and realises these opportunities first will be the one who benefits most.