Listen to Berkeley Talks episode #162: “Economists on what it’ll take to rebuild Ukraine.”
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Intro: This is Berkeley Talks, a Berkeley News podcast from the Office of Communications and Public Affairs that features lectures and conversations at UC Berkeley. You can follow Berkeley Talks wherever you listen to your podcasts. New episodes come out every other Friday. Also, we have another podcast, Berkeley Voices, that shares stories of people at UC Berkeley and the work that they do on and off campus.
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Jeff Pennington: Good afternoon. My name is Jeff Pennington. I’m the executive director of the Institute of Slavic, East European and Eurasian Studies here at the University of California, Berkeley. It is my pleasure to welcome you today to our panel discussion on Rebuilding Ukraine: Principles and Policies.
Our panelists today include four renowned leaders in the field of economics: Professor Barry Eichengreen, the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science; Professor Gérard Roland, the E. Morris Cox Professor of Economics and Professor of Political Science; at the very end there we have Professor Yuriy Gorodnichenko, the Quantedge Presidential Professor of Economics; and joining us from Chicago is Professor Roger Myerson, the David L. Pearson Distinguished Service Professor of Global Conflict Studies in the Harris School of Public Policy and the Griffin Department of Economics at the University of Chicago and recipient of the 2007 Nobel Memorial Prize in Economic Sciences.
Our panelists will draw on their vast experience and expertise to summarize trends in the region prior to the war between Russia and Ukraine, to assess war damage and to propose paths forward, laying the groundwork for future recovery efforts and increasing the chances of post-war success in revitalizing Ukraine. Lastly, I would like to thank our hosts today, the Social Science Matrix for use of their space. So without further ado, I’ll turn the floor over to Professor Barry Eichengreen.
Barry Eichengreen: Thank you, Jeff. I must start by apologizing to you and my fellow panelists. I am undressed by the standards of this panel, and I have to leave at 4:25 p.m., so if I duck out five minutes early, you will forgive me. We’re, among other things, summarizing some contributions to our volume on Ukrainian reconstruction that Yuriy helped organize some months back. My contribution to that volume was written together with Vlad Rashkovan, who is Ukraine’s man at the International Monetary Fund. It’s on how to organize foreign aid for Ukraine.
I was just teaching about the Marshall Plan to an undergraduate class literally an hour ago, so that makes an interesting pairing with this presentation. I would argue that Ukrainian reconstruction is a much more complicated endeavor than was the Marshall Plan after World War II when there was only one donor. There was a problem of coordinating the aid recipients, but the money all came from the United States, and the State and Treasury Departments didn’t face the task of coordinating with other donors.
Given that there are going to be many donors whose contributions take different forms that will finance different aspects of the economy’s reconstruction, how should this aid be organized? Vlad and I in the volume recommended creating a European Commission coordinated agency for the reconstruction of Ukraine. We argued that putting the European Commission in this coordination share made sense because EU membership is the economic and political endgame for Ukraine, as both Ukrainian and EU leaders remind us regularly, and the reconstruction has to proceed in a manner that’s consistent with EU norms and EU law.
We recommended that the agency should be headquartered in Ukraine, which would be conducive to deep Ukrainian involvement in designing the reconstruction process, Ukrainian ownership of that process and so forth. It could have a managing director experienced in dealing with the European Commission who had worked in Brussels for many years, but it should be headquartered in Ukraine. It should have a management team consisting not only of people from the EU, from other non-EU G7 countries, but also Ukraine itself so as to avoid the impression that Ukrainian reconstruction was exclusively a European endeavor. It could have a supervisory board on which other donor governments, multilaterals, like the European Bank for Reconstruction and Development, the IMF, the World Bank, similarly NGOs of various types could be represented.
Two weeks ago there was an announcement. There had been another proposal for how to organize aid for Ukraine that came from the German Marshall Fund for the United States, an NGO, German-funded operating out of Washington, DC, that was kind of a thank you to the United States for the Marshall Plan. They had a different idea that this entity should be headquartered in Brussels rather than in Ukraine, that the Group of 7 advanced industrial countries should be in charge and not the European Union. What we got out, I think, was kind of a hybrid in the announcement two weeks ago with elements of both.
What was announced by the principal stakeholders a couple of weeks ago was that the G7 should be in charge of recovery planning. We recommended a high European Commission European officials should be in charge. The German Marshall Fund recommended a prominent American should be in charge. What we got was a triumvirate, a steering committee with an American National Security Advisor, the Ukrainian Finance Minister, and a EU European Commission Director General, so it’s kind of a mix between the two proposals.
We were told that this triumvirate will provide strong, coherent leadership, but who exactly is in charge will rotate over time, and whether a rotating head can provide that leadership remains to be seen. It will meet together with political leaders, finance ministers, foreign ministers from concerned countries a few times a year. It will have a permanent staff of eight to ten based in Brussels with a field office in Ukraine, the opposite of what I would’ve preferred. Its meetings will include representatives of the IMF, World Bank, EBRD, etc., which is important and a step in the right direction.
That platform will start dispersing funds now, which is very much what Vlad and I emphasized and what the Marshall Plan did. For example, in Greece, it started dispersing reconstruction funds long before the Greek Civil War was over, acknowledging that reconstruction cannot wait. So in my view, what’s been done satisfies some of the necessary criteria but not others.
This task is going to be challenging because reconstruction needs will require raising funds from a broad range of different sources from bilateral intergovernmental grants, development organizations like the World Bank and the European Bank for Reconstruction and Development, the IMF for emergency budgetary funding, pre-accession EU funds, pre-accession EU structural funds, private donations, private portfolio investment possibly, although I have reservations about this idea, seized Russian assets. It’ll be important, as under the Marshall Plan, that these be grants rather than loans because Ukraine has plenty indebted already and more debt will just create more financial problems. What Ukraine needs instead is debt relief, and people, like our colleague, Maury Obstfeld, have written articulately about that.
A problem is that aid like this tends to be slow to materialize, and it needs to be mobilized now. There are other examples like the International Finance Facility for Immunization, AIDS vaccines and therapeutics in Africa, agencies that have been able to issue bonds, borrow now against collateral or promised future donations by governments. It seems to us this platform ought to be organized in that fashion as well.
All this leaves the question of exactly what projects should be funded. Vlad and I argued that the priority list of projects should be generated by the Ukrainian government, or as Roger is going to emphasize, Ukrainian governments which have local knowledge. But this new platform should develop together with the Ukrainian government data and digital systems for systematizing and controlling reporting on those projects. Ukraine has something called ProZorro, which is kind of a public procurement digital platform that provides information on projects, their funding, their stage of completion, and reconstruction would benefit from having something analogous. This platform could offer the Gates Foundation, and who knows whom else, a menu of financeable projects to fund projects. Those projects would be pre-approved and would have to be coordinated to avoid waste and duplication.
Finally, to repeat, I think it’s important when thinking about foreign aid, reconstruction aid for Ukraine to emphasize the importance of ownership for these reconstruction investments to be undertaken efficiently for the governance reforms that Gérard is going to talk about. The Ukrainians have to feel ownership, and they will feel ownership only if they’re deeply invested and have a significant element of control.
We wrote, “Ukraine will utilize aid most effectively when the disposition of aid is seen as consistent with Ukraine’s own interests. The Marshall Plan’s architect similarly recognized, emphasized the need for ownership on the part of aid recipients while they proceeded on the basis of trust but verify. They had their agents on the ground in the recipient countries. They were concerned about the potential for corruption and diversion of funds in Greece and Italy, to pick a couple of countries, not entirely at random, but they addressed those problems with people on the ground and that ownership in Ukraine has to rest on broad domestic support, achieved through not only interaction with the national government, but public consultation with local authorities, with civil society, and with business.” So let me stop there.
Gérard Roland: Thank you very much, Barry. I’m just going to talk briefly about my chapter, which was written with Tymofiy Mylovanov, who’s head of the Kyiv School of Economics. Actually when the war started, he returned to his country to help his country not only in terms of higher education, but also in terms of fundraising, etc. I also recommend to any of you who reads Twitter, Tymofiy has fantastic threads. They get better every day about what’s going on, life under the war, life with no electricity, life when you’re bombed, plus all the efforts that are being done to help children, orphans, etc., etc. He also talks about the events, what’s going on, the war, the future of the war, institutions, etc.
This chapter is quite actually complimentary to what Barry just talked about. Post-war Ukraine will not only need to rebuild its physical infrastructure, which is being thoroughly destroyed by the Russians, but also its institutions. To see it that way, basically we can see it as accelerating the post-Maidan reforms. Since the Maidan, he mentioned the ProZorro, but there are many, many other reforms that have already started. But the ambitions of people who participated, who led the Euromaidan, go much further than what has already been achieved.
The goal is for Ukraine to become a model democracy that would catch up with the most successful transition countries. Among transition countries, Ukraine is now in the middle of this Russian invasion. As horrible as it is for the people who suffer etc., war often acts as an accelerator of history. What seemed unlikely before the war, and there was a lot of frustration among the reformers with many reform not going fast enough, many of those things seem now within reach. The fact that Ukraine is now a credible candidate to enter the European Union is actually quite fundamental. So there is the chance with the end of this conflict and, of course, with international aid to achieve quite radical reforms in terms of Ukraine’s governance to get it completely rid of its Soviet past.
Now, first thing that’s very important is that Ukraine must become a full-blown democracy. This is a requirement that there should not be any waiting for that directly after the war. Already now Ukraine is going for EU accession, but it’s quite clear that EU accession is only possible if Ukraine fully chooses democracy. Just a few reminders here. Democracy is not based on ethnic identity. It’s based on citizenship, with rights and responsibilities based on the rule of law, with equality of all citizens before the law and protection of all minorities. Democracy places value of human rights above nationalist values that would contradict the former. Democracy is open to immigration, trade, and foreign investment. Separation of power is very important in democracies. There’s no unique blueprint here, and I don’t want to be lecturing here. I think Ukrainians have to make their own choices within the menu of what is possible and reasonable.
In terms of the reconstruction challenges, during the war right now all resources are mobilized for the single goal of military victory. But hopefully soon enough, once the Russians have been defeated, reconstruction will require multiple goals across time and space. This, of course, will require different leadership skills and also different organizational structures. Now, all this is important because the immediate post-war period is usually, for many countries, a critical juncture. What happens, what institutions are established right after the war is going to be fundamental for the future of Ukraine. We know that institutions establish these critical junctures. They have inertia.
Now, in relation to what Barry was saying, because obviously the role of the reconstruction agency is going to be very critical for the reconstruction of Ukraine and speedy decisions will be needed in reconstruction, that’s just how the world works, but the need for a speedy decision is perfectly compatible with the establishment of democracy once we recognize that speedy decisions will be needed. Actually, this was shown by the experience of post-World War II Western Europe and the experience of… It’s not a coincidence that we’re talking about parallels with the Marshall plan because the post-World War II experience of reconstruction in Western Europe and West Germany should help us here. The fact that even when Russia will be defeated, there very likely will be continued Russian threats. That is no good reason to limit Ukrainian democracy.
The reconstruction agency, so Barry talked about it, it was already in the very first report that came out of which many here are co-authors. This reconstruction agency should at the same time be an agency for European integration. So when Barry talked about commission-led, this makes actually a lot of sense because indeed the integration into the European Union is the end goal. Precisely with such a reconstruction agency, it’s being a transitional institution, that is an institution which the goal of which will end once Ukraine is part of the EU, precisely this can help to reconcile the need for speed with the needs to establish correct institutions in Ukraine right after the war.
So the structure and form of organization, so Barry talked about the leadership, the funding, etc., but the organizational structure is also going to matter for Ukrainian institutions. It will need to be accountable, but it will also need to have operational autonomy to allow it to operate fast and efficiently. This will help to reconcile the need for speed and, at the same time, the need to have full-blown democracy at the beginning.
This agency should be in charge of Ukraine’s process of integration to the EU, which seems absolutely reasonable. It should regularly monitor Ukrainian progress not through a bureaucratic checklist but through regular fundamental evaluations. It should also provide help when democratic decision-making threatens to descend into stalemate, which can happen. We live in the U.S., so we know exactly what stalemate is. So the relationship between the reconstruction agency and Ukraine, and by Ukraine, I don’t only mean the government and the central local government, but also civil society, the relationship between both should be based on mutual trust and efficiency.
It has been said but needs to be repeated, Ukraine must own the reconstruction, the aid programs must be aligned with the goals of Ukraine, and the collaboration between the reconstruction agency and Ukraine should contribute to build better institutions in preparation for the EU accession. So all that needs to take place at the same time. I don’t have time to talk about it in details. Details are sometimes very important, but it’s all in the report.
What should be done in terms of big institutional reform? First thing I would say is the priority of judicial reform. I was actually quite happy to read that actually after Zelenskyy talked to the European Parliament and the heads of European Commission that this was one of the conclusions, that priority of judicial reform was fundamental. Indeed, Ukraine cannot become a full-fledged democracy without the rule of law and a well-functioning judiciary. Reform of the judiciary has been a problem since 2014, since there have been attempts to reform it. Part of it is because it’s just very difficult. Training judges takes time, takes a lot of time. It must be done by experts, again, the scarcity of experts, but it must be done by non-corrupt experts who basically give the right values, the right attitudes, right process. But I would claim that the war has facilitated the conditions for this.
First of all, there would be much more international legal help, and it’s going to be important for judicial reform. It’s going to be quite important. Given the destructions that are taking place right now, the costs of judicial reform, relatively speaking even though it’s quite large certainly, is put into perspective when you look at the rest that’s been happening, and the high cost of reconstruction that’s being imposed on Ukraine puts this in perspective.
Because judicial reform is complicated, it cannot be done overnight. It needs to be done in a top-down way with the help from international experts. Things have already been going in that direction. This is not something new. If you look at the higher anti-corruption courts in Ukraine, international experts have been helping to filter possible nominees in this area. So this is something that can be done not only for the corruption courts but for the different courts.
Moreover, many judicial decisions will need to be taken right after the war. First, there’s a process of punishing the collaborators with Russia. There will be the need for special tribunals. The special tribunals, actually like there was after World War II in many European countries, they will need to be fast, but they will also need to respect fundamental principles of fair justice, so not mob justice, but fundamental principles of fair justice. Here, again, we have the experience and European countries showed that this can be done relatively fast.
Two, the operations of the Ukrainian reconstruction agency will need involvement of the Ukrainian judiciary if only for the enforcement of decisions, the contracts related to grants, etc., adjudication of disputes which will undoubtedly arise. Third, the rule of law is absolutely fundamental to avoid what has been called an illiberal democracy. Expectations among the population about the rule of law are actually fundamental in terms of guiding how people will behave, people’s attitudes towards the law, etc.
Having talked about the priority of judicial reform, some other important things are prevent the reappearance of oligarchs. We know that the power of oligarchs has been a big obstacle to reforms, and people have been fighting to reduce the influence of the oligarchs. There have been anti-oligarch laws that were voted very shortly before the invasion, so these need to be strengthened, and they need to be implemented correctly via the reformed judicial apparatus.
To prevent the reappearance of oligarchs, rigorous and effective competition policy is important. It’s fundamental to break up conglomerates that tend to be put together by oligarchs, to strengthen the powers of the anti-monopoly committee, and donor conditionality, by the way, in this process can actually be an important lever to accelerate all this. Last but not least, party finance reform is crucial to prevent oligarchs from intervening and from political influence. Here, the example of the U.S. is not a good one, but Europe has many party finance laws that can certainly be useful for Ukraine precisely so that public money can be channeled for fair electoral campaigns and to prevent oligarchs from trying to buy influence.
Media reform is also something very, very important. Media captured by oligarchs and ideologically motivated billionaires has been a threat to democracy the last decades. This is worldwide, whether it’s be Berlusconi, Murdoch, you name it. The list is long in many, many countries. It’s also clear that in the internet age one cannot return to old-style government ownership where the BBC would be the great agency that would give the information all throughout the world. That’s not the world we’re in anymore. Moreover, competition policy in itself is not going to be enough because media essentially produce information, provide information, and information is a public good, so it’s more complicated to deal with it than with normal goods and services.
Some good ideas have been formulated by Julia Cagé in France who’s been studying that very carefully because she considers that media are fundamental for a well-functioning democracy. Some of the measures include giving more power to journalists within media companies including free expression, veto rights over takeovers, so that goes sometimes a long way, transparency over the real owners, which very often is not the case. Unfortunately, the European Court of Justice has just ruled in the opposite direction against transparency, and so there’s also a fight taking place inside the European Union about this. She has other original ideas about giving media vouchers to citizens in terms of helping, using market mechanism to fund the media.
In terms of other reforms, it’s important to reinforce the existing separation of powers. Reinforcing the powers of the president would not be a good idea. One needs, moreover, to have a stable party system and strong discipline within parties to have a strong legislature. That’s something that takes time, but it’s important. One needs to continue the civil service reform that’s been doing lots of really interesting things in terms of digitalization, professionalization, transparency. Moreover, one needs to continue the drive towards decentralization. I’m not going to say anything because I know Roger is going to talk a lot about that, but certainly this is an important avenue in terms of reform. So that’s it. Thank you very much.
Roger Myerson: First of all, I’ve got a slide that has my notes of what I hope I’ll say something, but let me try basically speak in sequence responding to things that people have started. I should first of all say, look around at the panel around me and you see the proof of why, if one wants to be part of a discussion about the problems of Ukraine, the situation and how to think most deeply about how to help Ukraine in the future, that coming to Berkeley is the place to be. Because if you can’t be in Ukraine, if you’re going to be in North America, let’s say, the co-authors around me who contributed and edited this important document and the people who I share this panel with are the proof. I’m very, very glad to be here, and this is really an important discussion.
The Russian invasion has caused vast destruction in Ukraine. Post-war reconstruction’s going to be expensive. The estimates are $500 billion, a trillion dollars over the coming decade. As Gérard has emphasized, decisions will have made quickly. As Barry has emphasized, things should begin even before the end of the war. Even when we do not know when an end of the war with Ukraine’s freedom being one and guaranteed is in sight, it’s appropriate to begin planning and thinking about that now because the aid is needed.
Hopes for a more peaceful world will depend on maintaining the principle that international military aggression cannot succeed. I would argue that perhaps the most fundamental goal that drove Putin to launch this war was his desire, his sense of urgency, I think, in his mind that he wanted to prevent Ukraine from providing a positive example of successful democracy in a neighboring Slavic country that could inspire Russians to question whether they need to be governed by a corrupt autocracy in Moscow. Putin could lose the war, be driven out of the territory of Ukraine and still achieve his goal, if even after defeat Ukraine is left in ruins and people in a ruined nation suffer the legacy of war.
Therefore, I would argue that generous offers of reconstruction assistance from the United States, from Europe, from the world will be appropriate because they will benefit the global interests of the donors as well as, most importantly, the recipients in setting a positive example for the fact that a military aggressor cannot achieve his goals.
I should say at least briefly, it certainly can be argued that the Russian Federation has a moral obligation to pay reparations for the damages that they’ve caused. This is their decision to launch this war. I have myself studied the post-World War I reparations where efforts to extract reparations from Germany poisoned German politics and ultimately set the stage for the rise of a militant regime and an even more disastrous and destructive Second World War.
That precedent suggests that whatever happens at the end of this war, whatever the political situation in Moscow may be, that we should not be too optimistic about trying to compel Russia to pay more after the war. I’m not an international lawyer, so I can’t judge seizing their assets, but it sure sounds… Let me just say with no other credentials than being a human being that I can’t imagine anything more just than taking seized assets and using them to help rebuild Ukraine, seized Russian assets. But I would urge us not to be too optimistic about paying for the rest of the reconstruction by subsequent charges on Russia.
That means it’s going to be expensive. But I would argue that we would think about reconstruction over a period of years. It’s going to take at least five up to ten years of work. The cost of reconstruction over that period will be a fraction of what the United States and its European allies expect to pay for defense in that period. As a precedent, that’s going to help to make a more peaceful world, and investment and reconstruction assistance should be judged as a good investment by the same standards that we judge investments in our huge defense budgets.
Of course, assistance funds have to be spent effectively. Here, I have to say, I’m most influenced by, I want to say, a basic lesson from the Marshall Plan for post-war reconstruction Europe in 1948 was that foreign reconstruction assistance can be much more effective when it helps promote reforms that will be important for the subsequent growth of the recipient. This is an analysis I take from the excellent paper by Barry Eichengreen and Brad DeLong in 1991, an analysis of the Marshall Plan, and I think they made the case extremely convincingly. It’s an important point. Yes, in 1948 the key thing for Europe was to lower barriers to international trade between European nations. Reforms are difficult because there are losers from reforms, but there are a lot more gainers. That’s why you want them. Reducing national protection within Europe that was against the exports of other European nations was only impoverishing the continent as a whole.
So we now have to ask in the 21st century, what are the reforms that need to be encouraged in Ukraine? Certainly, Gérard has emphasized judicial reform among others as high on the list, and Barry has emphasized that, I think, it’s widely agreed that Ukrainians need to get ready to become part of the European Union. That is one of the aspirations of the Ukrainian people, put in their constitution. It’s for that reason that we’re talking about urging the donors to agree on working through a reconstruction foreign assistance coordinating agency that is run by the European Union or at least required the standards for fiscal controls for appropriate budgeting and fiscal reporting that are part of well-managed government spending.
The United States has standards. Europe has standards. Whose standards do you want to apply? They’re all good. The answer should be, of course, the European standards because that’s the standards that Ukrainian government officials should be learning, and they don’t need to learn American standards where they differ from Ukrainian standards. So it should be through a European agency.
But I would argue, one of the other truly crucial reforms in Ukraine has been, and it is still incomplete, a decentralization of Ukraine. I personally have been involved with Ukraine since 2014 when working with Tymofiy Mylovanov. I was an advocate for decentralization because we understood that, although there were locally elected mayors and there were local councils at the provincial level, the mayors had no reliable budgets, and the provincial and district councils had absolutely no influence over any executive power. They were very limited influence. They had no real power. So everything in Ukraine was centralized.
Let me just emphasize, I think one of the important sentences, I’m going to quote directly from Gérard’s chapter in the book with Tymofiy Mylovanov. “It’s very important that the Ukrainian government owns the reconstruction, that it sets the priorities and suggests the projects for the reconstruction agency to fund and implement.” The phrase “the Ukrainian government,” I completely agree with that, but we need to not jump to conclusions about what the Ukrainian government means. If the Ukrainian government means only the president’s office, that clearly is a mistake.
The Ukrainian people need to own the reconstruction process through their democratically elected government. They have a democratically elected government, but it consists of, yes, a prime minister who’s responsible to the elected national assembly, the Verkhovna Rada, the legislature of Ukraine, a popularly elected president, and there’s a new system of local councils and mayors that has been created in the years 2015 to 2020, a reform. The municipal boundaries in the countryside were changed.
The other major reform was that reliable budgeting was given. Now in Ukraine, 60% of the personal income tax that people pay by law since 2015 goes to the municipality in which the individual resides. Now, that’s not as much as it sounds because Ukraine is more funded by the value added tax than personal income tax, but it is a substantial funding. I think it’s of the order of about 20% of the total public budget that goes directly into the municipalities, and that didn’t exist.
To understand something, let me say, one of the things we should think about, just to appreciate the importance of this, in March and April of 2014, after seizing the Donbas, I’m sorry, after seizing Crimea, a small band of Kremlin-inspired or Kremlin-directed subversives managed to subvert local governments in much of Donetsk and Luhansk provinces. Resistance was weak. When we were debating decentralization, there were some people who thought decentralization would pull the country apart, but I would argue exactly the opposite, and the history since then will prove that it’s exactly the opposite.
The problem in 2014 was that everyone in these eastern provinces understood that under the centralized government of Ukraine that had a centralized system that had been inherited from the Soviet era, yes, there was democracy and the new national government was going to be elected by millions of people, but most of those millions of voters who were going to vote for the new leadership were people in Central and Western Ukraine, and that this new national leadership was going to totally control the local administration. That meant that in many areas of Donetsk and Luhansk and other eastern regions, there could be communities where nobody thought they were going to have any influence over the future of their local administration. So even locally respected leaders had no power and no incentive to stand up and take some risks in organizing their communities to resist the not necessarily popular subversive separatist message of the Kremlin even in that time.
Since the reform, absolutely every part of free Ukraine has locally elected mayors with real responsibilities who are in power because their community trusts them, they elected them, and who have a real budget, and they have stepped up. We’ve seen in occupied areas the Russians systematically targeting the mayors because they know that they become leaders of resistance. The resistance of the Ukrainian people has been heroic in 2022 and where it was painfully missing in the Eastern Ukraine in 2014. There are several important reasons the Maidan reforms have a lot to do with much of this, but the decentralization reform is an important part of it. As Tymofii Brik and Jennifer Murtazashvili have observed in Foreign Affairs recently, that citizens of Ukraine have rallied not just in support of President Zelenskyy and Kyiv, but also to defend their locally elected mayors and community councils.
It’s for that reason I’d want to suggest that we should recognize that the decentralization reform is one of the most important reforms. It has strengthened Ukraine against foreign resistance. The reform has been in place only a few years, but I can cite some articles in VoxUkraine that show evidence of that in the first two years that local public spending was measurably improved by having it handled by locally accountable local officials, mayors and councilors who owed their votes to the people who they were spending and in support of as opposed to the presidentially appointed older system, the presidentially appointed governors.
So to support and advance this, I would argue that the foreign assistance budgets, at the macro-level, should plan to take a significant fraction. If I was going to name a number, I’d say one third. Maybe if it’s 20% of the public budget, that seems like a floor, but I would suggest some fraction, not necessarily a majority, but some very significant fraction of the public budget should be set aside for projects that are being directed by locally elected officials, the mayors and the locally elected local councilors at the municipal level and even at the district level. There could be a formula saying how to take the portion that is set aside for local reconstruction projects that can be divided by any kind of objective formula among the various districts of Ukraine.
I would certainly urge that the foreign reconstruction assistance agency should have an office in every district, an official who knows the EU system, can help the mayors and the other locally elected officials to work together to formulate district-wide plans for how to spend the money in ways that are properly budgeted with proper controls according to the international standards that this agency should impose, and that kind of assistance should be part of the story.
I wish that we could have put this more in the book early because the book that we’re celebrating today has chapters that focus on a variety of different specific areas: health, education. Some of those areas, the discussion should be starting now, which of those areas are particularly appropriate to expect the local governments to take the lead on and which of them, of course, should be run out of Ukrainian officials under the president and prime minister of the nation, as I say.
I think I would like to cite before quitting, that having the foreign assistance engaged with the locally elected officials as well as with the national government, understanding that Ukraine, it’s a separation of powers between nationally elected individual officials and locally elected officials. That, as in the United States, for example, benefits them, that the foreign assistance being engaged with both levels will improve monitoring. If there’s a project that’s funded and administered under the national government and it promises to provide a certain kind of local benefits that it totally fails to provide, you can expect that the mayor of an adversely affected community might communicate that fact to the European officials, to assist with international monitoring. It’s good to be engaged on both levels.
To end, I’d say, we understand, I think that those of us who are working on this area are thinking about this, we start with a sense of optimism that, yes, that controls that the Ukrainian people want, the Ukrainian government wants, and that the international donors want can reduce the threat of money being wasted, stolen by corrupt diversion. But an economist has to say that there’s going to be private management of public reconstruction projects, that’s the right way to do things throughout the world, and contractors who do this should expect a positive profit. People who take the risks to manage these projects should be doing so in a way that they get some kind of… If they do their job right and manage it efficiently, they should be expecting to make some money on that. That is how contracting works.
We’re talking about vast sums of money. The amount of money we’re talking about, the estimates of reconstruction costs are between three and five times the annual GDP of Ukraine before the war, a large multiple of annual government spending before the war. So there’s a lot of profits to be made even with well-managed… Where we’re talking about of the threat of a new oligarchy, if all of the money, if $500 billion over five years is given to Ukraine entirely under the direction of an agency that is, say, under the president of the country, there will be a handful of business people who are well connected with that agency. We cannot discount the possibility that even with a well-managed, well-monitored system that the most profitable contracts are going to be steered to people who have personal connections and the trust of high officials. That happens everywhere in the world.
I would stipulate that it would be much better for the future of Ukraine if the vastly wider circle of business people who have connections with their local mayor’s office, that all of them have a chance to get some inside track on offering their services as contractors for profitable contracts. For that extent, decentralizing money and decentralizing authority over the aid donations will be an important way of limiting the threat of a future Ukraine that is dominated by a small circle of oligarchs.
Having said that, I should say that we should recognize that in international conventions, the usual system is for all aid to be centralized. So I would say it’s particularly important that we should be trying to emphasize the question of decentralization, of putting forward the claims of the mayors to have a share of international assistance directly from the donors and in contact with the donor agency because the international norm is to work only through the highest levels of the national government, and certainly the highest levels of the national government are going to have a lot of people there who, with all the best intentions, will be in a position to have their friends profit from their controlling as much as possible, so they’re not going to volunteer to give it to someone else. So I do stipulate that this is something that, if academics don’t talk about it, nobody else will, so let’s start here and raise this question. Thank you.
Yuriy Gorodnichenko: Thank you so much. First of all, I want to thank everybody who participates in this panel for coming and sharing their thoughts, also contributing to this book. I have a small job to summarize 400 pages which we’re not covered by the panelists here. Also, what I’m hearing is that the reconstruction of Ukraine is a continuous process. This is one report. We had an earlier report issued in April of 2022. At that point, it was still very, very much uncertain if Ukraine is going to survive the invasion. We have a little bit more information now, major developments. Ukraine is a part of the European Union, and so we felt compelled that we need to update this document. Now we have new ideas, decentralization, how we should organize the governments. I’m sure we’ll have another volume describing how reconstruction of Ukraine should look like.
Now, this is a book with 14 chapters which can be grouped into four buckets. One is about hardware. What do we do with energy sector? What do we do with transportation infrastructure? What do you do with business environment? What should be the labor market? What should be the taxation system? What should be the regulatory framework? Also, what should be the software, the institutions and human capital? Gérard already talked about the importance of institutions for economic development. Roger mentioned decentralization. This is all about software, something which is not buildings, bridges and so on. Now, I don’t have time to talk about principles. Many people already mentioned that: ownership, coordination, fighting corruption, EU integration. This is all important that we should keep in mind when we designed the reconstruction that what we want to achieve was this.
Now main takeaways, so I’ll try to summarize all these other chapters in a series of slides. First of all, obviously we have to minimize damages now during the war. If you don’t have proper education for children, and this is going to have a almost permanent effect on the life trajectories of many, many kids, students and so on, so we have to help those people now. We don’t have to wait until the war is over. One also implication of this is that Ukraine obviously needs more weapons to defend itself. It’s very clear. We don’t want to have energy infrastructure destroyed completely. We want to save as much as possible.
The second key message is that, now during the war, the pressure on Ukraine is extreme. We don’t have resources to pay pensions, to pay for education, to buy weapons. It’s very clear that in this extremely critical juncture, Ukraine does not receive a stable flow of support, economic aid, military aid from its allies. The current infrastructure is not good for that. We have delays. We have promises which never fulfilled. Barry already mentioned that we need new infrastructure for establishing a stable flow of aid. We need new institutions like this development agency. We need new financial instruments when Ukraine can or this agency can bore against pledges of future aid from the allies, and so you can get money today. You can get this reconstruction front-loaded when the need is the highest.
The third message is that it’s very clear it’s going to be extremely costly, $500 billion, a trillion dollars. At this point, it’s a very fluid number. We can have more or less. It depends on how much destruction we have in the end. But it is very clear that public money is not going to be enough to rebuild Ukraine. We don’t need too much public money. In the end, it’s going to be private investment that is going to bring technologies to Ukraine, know-how, integrate Ukraine in value chains, global value chains, make sure that Ukraine is going to have a sustainable economic trajectory. So the main objective here then has to be that we take public money and try to leverage as much as possible this pot of resources.
Try to provide, for example, military insurance. There is a lot of risk associated with doing business in Ukraine. If you worry that tomorrow you can lose your factory because it’ll be attacked with Russian missiles, obviously you’re not going to make an investment. But if you have an insurance which is going to cover most of your losses, it’s going to make it much more attractive. We have some other elements of what you can do, like public-private partnerships. We have development banks that can take equity stakes, risk sharings of all types that can be done by the Ukrainian government or other governments. So the main objective here is that you have to attract private money as much as possible.
The reconstruction of Ukraine is not about rebuilding Ukraine to the state it was on the 23rd of February, 2022. We don’t want that. We have to have a real audit of what we have, where we go, and what we need to do. For example, this map here shows the railroad network in Ukraine. It’s Moscow-centric, north-south. Ukraine is not going to trade with Russia anytime soon. So the rail should be going east-west. For this, you need to have new tracks. It’s number one. Number two, because you’re going to trade with the European Union, you have to have the same gauge as the European Union.
It’s going to be costly, this is some estimates, but you’re not going to do it in one year. It’s going to be spread over 10 years. It’s a lot of money, but it’s a huge investment that needs to be done. It also has a security component because what Russians are doing now, they’re basically using the Ukrainian network to transport their troops because they have exactly the same gauge. So if we change the gauge, we not only make it easier to trade with the European Union, we also address a major security concern.
Some sense, it probably will never come back. Cities in Eastern Ukraine have been declining long before the war. The war accelerated this process. Economic activity was shifting towards the West, towards the European Union. Frankly, I’m not sure what is the future of some of the cities. They don’t have any fundamental to be there anymore. There used to be like a Soviet factory. That Soviet factor is destroyed. Why people would come back there?
Some cities obviously will be rebuilt. For example, Mariupol is here. It was totally destroyed, but it has some good economic fundamentals. It’s a big port city. You have supplies of coal, iron ore, and so on, so it can be a very prosperous city. But for some cities, for example, Kharkiv, it’s only 40 kilometers from the Russian border. It may be shelled, even now it will. So what do we do with the city? It’s the second largest city in Ukraine. Imagine Los Angeles can be attacked by whoever, is this was going to be a prosperous city? Probably not. But we have to think about what we can offer to the city so that it can have some fundamentals to be prosperous.
We talked a lot about this, that the speed is critical. So if we want to have successful reforms, we have to front-load them. We don’t have to wait until the end of the war. All this talk about corruption and so on, we can handle this even now while missiles are flying. We can have a new law, a new institution, a new agency to enforce these laws. Because everything else that is going to happen at the reconstruction agency when big money is going to come into Ukraine, it’s all going to rely on the quality of institutions, how much anti-corruption you can have, how much de-oligarchization you have in the country. Decentralization is great because it creates competition. More powers to anti-monopoly, antitrust agency. That’s going to be good because it’s going to undermine the economic base of oligarchs. Obviously, the sooner you can align everything with the European Union, the better and faster the process is going to go. Because if you want to have a flow of money going into Ukraine, it’s a lot easier if the rules are the same in Ukraine and, say, in Germany.
I already told you that we see massive relocation of resources. People during the war, millions of people left their homes. This process was already happening before the war. People were moving from Eastern Ukraine to Western Ukraine, to Central Ukraine. This process was going to be accelerated. We’ll see massive relocation of capital, labor, resources. We need to set up a framework that is going to facilitate, not slow down this relocation. So it means a small liberal economic environment. You have to retrain people. You will have lots and lots of veterans. You have to use them productively. Some people are going to be still outside Ukraine, but it doesn’t mean we cannot use them. We can use remote work. If somebody has expertise, this person may contribute via Zoom or something like that. We know the sustainable economic trajectory is only possible if you have solid human capital. It means you have to invest a lot in R&D and science, probably it’s natural at Berkeley to say this, but also in education.
Ukraine had good initial conditions in ’91 when it became an independent state. But over time, there was almost conscious disinvestment into this, and we need to reverse these trends. We have to get rid of social metrics of success and move away from quantity-based measures to quality-based measures. Obviously, also inclusion is going to be a big deal. So many people are going to be traumatized by the war. We need to help them, so inclusion is going to be a very important element of reconstruction.
The final point I want to make is that we’ll often frame this as a one-way street. Money goes from outside the world towards Ukraine, but in fact it’s a win-win situation. Ukraine has a lot to offer to the European Union and the world. Ukraine is a major source of agricultural production. It’s going to only grow in the future because productivity in this sector in Ukraine is still very low, so you can easily double agricultural output.
European Union has struggled for years to develop its own Silicon Valley. You think about IT companies in Europe and you can’t hardly name any. Ukraine is a sort of [inaudible] area. You have this ecosystem created in Ukraine where you can do anything in the IT sector, and it can be super successful. Many people don’t know, but the number one export from Ukraine to the United States is IT services. So it tells you that this is where the future is. Even during the war now, the IT sector grew in double digits. So in this very difficult conditions, when you don’t have electricity, you can still be very, very successful. It tells you something.
Friendshoring, it’s a big deal. We already evaluate our abilities and risks. If you trade with China, you start to wonder, is it really a safe investment? Maybe we should have our production or production chains, value chains relocated to more friendly countries. Ukraine has a lot to offer in this respect. Think about, you need to produce something and ship it to Europe. If you have a container, put it on a truck in Kyiv and ship it to Berlin, it’s going to take only one day. If you want to ship a container from Shanghai to Hamburg, it’ll take a month. In this current economy where speed is everything, this geographical proximity is a huge advantage. Now, on the top of this, we have a highly educated labor force. It’s going to be very cheap. So we have every reason to be optimistic about friendshoring as a source of growth in Ukraine.
Now to conclude, you look at the images of Ukrainian cities and it looks horrible. You wonder if economic life or people are going to return to this places. But frankly, we have seen this before. This was Cologne after World War II, total destruction. The bridge is destroyed. The whole downtown is completely in ruins. The only place that is still kind of reasonably intact is the cathedral. You think, the city is done. Nobody’s going to come back. This is how Cologne looks now, a very vibrant city, a lot of economic life. People want to live there. If we can do it for Cologne after World War II, we should be able to do it for Mariupol as well. So to conclude, if you didn’t have a chance to read this book, it’s meant to be accessible to the general public. Hopefully it is. It’s a little long, 450 pages. Obviously, we look forward to an opportunity to develop these ideas further and happy to get your questions and answer. Thank you.
Jeff Pennington: Any questions? Pass around the mic.
Audience 1: A brief comment and a question. This war in Ukraine is really for two purposes, to benefit the U.S. military industrial complex and the 1% of the West, and for the U.S. fossil fuel industry. Biden said he would make sure of that. The people of Europe have never been able to get along and now not even though they’re all capitalists. So what else is new? Ukraine should be the EU’s responsibility, not the U.S.’s responsibility. The U.S. needs to rebuild the Black and Brown lower-income community right here and to reinforce and upgrade and rebuild our own infrastructure, especially electricity and water. I’m sorry to say that, in part, Professor Myerson engaged in a bit of PR war propaganda. My question is, what happens to the European economies and the European financial markets if or when the first nuclear weapon goes off on European soil?
Yuriy Gorodnichenko: Maybe because you’re involved in propaganda.
Gérard Roland: First of all, let me respond to the role of the U.S. in a way. There is the argument, and I’ve heard many people say, it’s Europe’s responsibility. The U.S. should not be involved. I’ve heard that a lot. But you have to see that what is going on right now with the Russian invasion of Ukraine is fundamental not only for peace in Europe. The Europeans understand that. The people of the Baltic countries, in Poland, they had been invaded at some point by the Russians, so they know what it is to be occupied by the Russians, and they understand the danger. Look at what’s happening in Moldova these last two days. So it’s not a vain threat.
But it’s also fundamental for world peace for at least two reasons, and that’s why I think the U.S. should play a role. First of all, Putin wants to go back to 19th century imperialist politics where you divide territories among big powers, and it’s all imperialistic motivations, etc. Therefore, a big country like Russia should have the right to its buffer zones. It should have the rights to invade other countries. It has its own legitimate concerns. It’s big, and so therefore, it’s legitimate. This is quite important.
The international order does not function very well. In democracies, we talk about the rule of law. You don’t really have the rule of law at the international level, and the U.S. has a responsibility in it, that in some administrations they violated completely international law, etc. But it is a general aspiration of the world. Already you see the fact that dictators who are murderers in their own countries, that they can be brought to justice in The Hague. So these are all new events.
I think the future of the world is one where we try to have a rule of law at the international level. Putin wants to go exactly in the opposite direction, which is why the Ukraine conflict… If Russia wins, then that means we’re going to go back to 19th century politics, and with nuclear weapons, this is a recipe for catastrophe.
Number two reason why the U.S. should and why it’s also playing a role actively is that China is looking at what’s happening in Ukraine. If the Russians win and they say, “Look, we’re three Russians for one Ukrainian, Taiwan versus China, a much bigger ratio, so we just go and take the islands.” On the other hand, if Russia is defeated, I think many people in China will think twice. Also, frankly, as much as right now the Ukrainian conflict remains on European territory, any invasion of Taiwan by China could really very quickly turn to World War III. Then, who knows what’s going to happen.
Therefore, I think the fact that helping Ukraine win is actually fundamental for world peace. It’s fundamental for the future institutions of the international order, but it’s also quite fundamental for world peace. I just heard, I don’t know if this is really happening, Wang Huning, who’s the chief ideologue in China, has been put in charge of rethinking the role of Taiwan. One idea that came around is that, “Well, let’s call Taiwan as part of a Chinese commonwealth, just like Canada, Australia is in the UK.” If they did that, I’m very skeptical, but if they did that, this could prevent war in Asia. This is partly a reflection of what has been happening with the Russian failures in Ukraine. So everything is connected.
Roger Myerson: Thank you for your question. I think it is appropriate. We are here to have an academic discussion. Nobody here is running for office. The questioner suggested other priorities. I think he didn’t have time, of course, to list the details of what he would want to spend more money on. But I suspect that if he did get into details, I would be one of the people on his side who would agree. I regret that it was… I did try to address the question of, why should the United States commit large resources and why should Europe and other parts of the world commit large resources to reconstruct Ukraine? I’ve given that argument and I will say so. It was not intended as propaganda. It was intended as policy analysis.
We live in a world where different people have different priorities. There are many priorities for public spending. There is a political process for that. My agreement with the questioner about funding certain priorities to help people right here in the Bay Area, in poor areas of the cities and the countryside, if we’re talking about spending more, it’s because the political process has not prevailed in favor of the questioner and myself.
But I tried to say, we are spending a great deal on defense. We are spending an enormous amount on defense. That defense, you can question it, the questioner certainly would, but it has a purpose. It has a purpose to have a peaceful world. We, in fact, live in a very peaceful world compared to much of human history. A taboo against international conquest is an extremely important part of that, making the world more peaceful than it was in the previous century and in centuries before that.
What I argued was, given the amount of money that the United States spends on defense, that repurposing some of it now to help the Ukrainians fight the war and repurposing it to help the Ukrainians to rebuild their country after the war makes sense, is a good investment by the very standards by which we have, our country, whether the questioner would agree or not, decided it is worth Americans’ while to invest a great deal in military preparedness, that this is for the purpose of ensuring we live in a peaceful world.
If this aggression against Ukraine succeeds, the world will be much more dangerous for all Americans and for all residents of the world, and, by the way, I would say also for people in Moscow, that it will be a vastly more dangerous world, and that is the urgency with which we have gathered today. We have a sympathy for the people of Ukraine. We want them to be well off. We also have a sympathy for people in other parts of the world. But hard self-interest also motivates not just generosity, but our hard self-interest is an argument, and that was what I tried to make.
Barry Eichengreen: I’m going to have to excuse myself, Jeff, in a minute. My view is that I share the priority you attach to advancing social, political, racial justice in the United States. But history, as I read it, shows that if we attempt to do that in an unstable geopolitical environment where we turned inward like we did in the 1920s, we will fail.
Audience 2: Thank you for the lecture. I think this plan is really comprehensive, and it might really work. But, my question would be, do you think it might be a little bit too ambitious? Because it seems to me that this plan would face pressure from oligarchs, from governments like Russia, and also maybe even pressure from the public if they’re not found of large-scale reforms. So are you guys concerned about this?
Gérard Roland: One thing you have to see is that Ukraine became independent in 1991. Not much happened. There was a lot of corruption. The privatization was really a mess. Oligarchs came around. But in 2014 with the Maidan movement, this was a really revolutionary movement where the young people, people who were fed up with the corruption, they wanted reform. They wanted to be a true democracy. They didn’t want to be a Russian satellite country. They want to be part of the European Union. That’s also why they call it the Euromaidan.
Now being invaded, look at all those Russian-speaking people that Putin was there coming to save in Mariupol and everywhere, destroyed. The children being deported somewhere in Russia, we don’t know where, etc., etc. So the supports for Ukrainian defense against Russia is much stronger than it ever was. Roger talked a little bit about some of the problems after the Maidan with people in Eastern Ukraine, but now people are all behind the Ukrainian army.
Think about it, countries invaded by Japan in World War II or by Germany in World War II, the population is really very strongly behind it. Of course, there are collaborators. There are opportunists. Those will be punished later on. Surely, they will be oligarchs. By the way, their power has gone down tremendously because their assets have been destroyed by missiles, but also the anti-oligarch laws. Their influence during the war has gone down. There is now increasingly, this is something really new, a strong intolerance of Ukrainians towards this kind of politics, relying on oligarchs, these kind of feudal relations where you become some kind of valet to oligarchs. So there is very important change that’s taking place right now because of the war.
Audience 3: I have a question about, oh, thanks, the ethnic and cultural [inaudible] between the East and the West. While the Russians have actually become now the common enemy and really misplayed and misunderstood that, those ethnic tensions exist. They existed before and they’ll probably exist afterward. While decentralizing certainly is one way to handle that, is there also a cultural component of that that needs to be considered similar to, say, what happens in Canada? Is there always going to be a certain amount of ethnic and cultural distrust or tension regardless of these other reforms?
Yuriy Gorodnichenko: Half of my family is from Eastern Ukraine and the other half is from Central Ukraine. We were always bilingual. You can speak Russian or Ukrainian. So as far from my perspective, all these ideas that there is a giant tension between East and West or in some other part of the country, this is an exaggeration. We always lived in peace. There was no war.
One advantage of decentralization is that if somebody wants to… Ukraine has a lot of diversity, ethnic diversity, language diversity. You can speak any language. Nobody’s going to complain about this. One strength of Ukraine is that it has been an inclusive society. Our president is a Jew, right? There are very few countries out there who have a president who is not coming from the major ethnic group. We have lots and lots of people from Bulgaria, from Hungary, from Greece. One of the biggest minorities in Mariupol were the Greeks, and they were totally decimated. One of the cabinet officials from Greece was trying to rescue them. They lived peacefully. They never had problems with the government or being oppressed or anything like this.
We can help these communities to develop further. This is why the decentralization is so important. If somebody wants to teach X language in school, they should be able to do that, and it’s important to give resources for these local communities to achieve that objective. They have to have a stable tax resource. They should have freedom in making those decisions. I’m a big supporter of decentralization reforms.
Roger Myerson: The presidential election results in Ukraine’s independent history from the ’90s through 2010 show enormous polarization between East and West. That ended in… The 2014 and the 2019 presidential elections, the winning candidates got majority votes on all sides of the country. The threat of the Kremlin that we can give Putin a little bit of the credit for bringing Ukrainians together, people are being divided, but those divisions have changed since objectively.
Audience 4: I would like to thank you, first of all, very much for your endeavor. As someone who is studying Russian nationalists, as a Greek, by the way that you just mentioned, studying Russian nationalists, and have been keeping a close eye on what’s going on in Ukraine, I was very pleased to listen about the reforms that aim to bring Ukraine closer to the European Union. I would like to ask you, do you think realistically this could happen anytime soon? Obviously after the war, Europe also has an interest to drag Ukraine in the [inaudible], maybe more than when it’s had an incentive, more than the 2014 Euromaidan. What would you think the perspectives will be nowadays to come closer to Europe, even with integration, if this would be possible? Thank you.
Gérard Roland: A lot of European politics is basically you talk, you talk until you have a solution, and it’s always a moving target. So whatever is said today has to be taken with a grain of salt. But Ukraine is a candidate to be a member of the European Union. That’s something very important. Everybody agrees that the reforms that have been implemented already, it’s going really fast. Moreover, we also understand the geopolitical aspect. You have the bureaucrat at Brussels say, “Oh, oh, wait, they have to do these thousands of pages. They have to coordinate, synchronize, etc.” The geopolitical aspect is also quite important here.
If Ukraine succeeds, it’s in the interest of the European Union to have it firmly inside the European Union. Frankly, we don’t know what’s going to happen with Russia. But this is something that certainly the Germans have always understood. Russia is there. You can’t ignore it. So even if Ukraine wins now, many problems will be postponed for later. One thing people realize, it’s true that many Europeans have been free-riding on the U.S. military support and that they should do much more for their own defense. Again saying, is it going to be two years? I think so far what we’ve seen is on the right track.
Jeff Pennington: Well, if there are no more questions, I would like to thank again our panelists for today. Please join me in thanking them. Thank you for attending this afternoon. Have a good day.
[Music: “Silver Lanyard” by Blue Dot Sessions]
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