Even before battlefields are silent, the battle for billions in Ukrainian reconstruction budgets has already begun. Top U.S. policy makers, including Secretary of Treasury Janet Yellen championed the initial assistance package to Ukraine, which passed (86-11) in the Senate on May 19.
However, talking about specific reconstruction programs while fighting continues is premature. This is not skepticism towards assisting Ukraine in principle. Every drop of useful military assistance and financial support can and should be made available. To this end, trans-Atlantic and European cooperation will be vital to help Ukraine restore its economy after the war ends.
The amounts bandied around are staggering: $550-600 billion to be administered over 10 years. As Ukraine is a part of Europe, and as the U.S. already carries most of the burden of military assistance, a 70/30 distribution of aid between the EU and the U.S. should be only fair.
While Western countries may try to save by utilizing frozen Russian currency reserves, estimates are that there are only $250-$300 billion arrested. EU Council President Charles Michel is calling to confiscate these funds and channel them for Ukraine’s recovery, but more clarity is needed for the sources of law to expropriate and re-purpose these reserves.
Another source of saving may be bringing Asian allies — Japan, Korea, possibly Taiwan — to invest as well, in order to balance off China’s involvement in the Ukrainian economy. We need an historical perspective to best analyze these Ukrainian reconstruction plans.
The Marshall Plan was only $15 billion for major European economies in 1948, with the existential threat from Stalin’s Soviet Union casting a long shadow over Europe. France and Italy were on the brink, with strong communist parties threatening their future. The UK, blood brother of the U.S., received a quarter of the package; France received less than one-fifth; West Germany, the front-line state, received relatively more than smaller economies. Assistance to Germany was particularly vital, as it demonstrated Soviet failures in East Germany and showcased the generosity and respect America accords its allies. In today’s terms, this amounts to $179 billion for the whole of Western Europe. Granted, the economies now are much bigger, but the scope of destruction in World War II, which lasted seven years, was also greater.
In that respect, the visionary Marshall Plan succeeded beyond expectation, immortalizing its author, U.S. Secretary of State George Marshall. It also tragically bequeathed the misinformed a set of incorrect lessons about foreign aid. The Marshall plan succeeded not because it pumped Europe full of cash, but rather because conditional, surgical, and targeted infusions of capital allowed European industry to organically restart and participate in the global economy. This capital went to manage balance of payments, buy food, purchase American manufactured goods, and invest in new technologies.
Ukraine’s situation is fundamentally different.
A fair balance of grants and loans is imperative. While Kyiv would like to have most of the assistance as grants, it is not practicable nor fair to the taxpayers in the EU and the U.S. Immediate rebuilding may come from grants, but those should be shared between Ukrainian agencies, ministries, and companies, and their western counterparts. Poland after 1989 is a good example of limited Western grants effectively revitalizing a national economy. This will likely mean an increase in Ukrainian debt, which is already close to 70 percent of GDP.
Importantly, it requires a host of structural reforms to be implemented before capital can be effectively utilized. Moving Ukraine from the bottom of the European GDP per capita ladder requires more than cash. Prospective donors should be aware of many challenges, including high levels of corruption, an oligarchic economic structure rotten with bad actors, EU members piling up barriers to Ukraine’s integration into the West, a lingering state-driven economy, and remaining structural dependency on Russia.
Overcoming these challenges is neither insurmountable nor an excuse to deny aid.
Economic reforms are the indispensable. There are plenty positive examples to draw from. Agricultural reforms to boost production are still needed. Donors should also ensure funds are spent transparently through competitive bidding processes, supervised by the Westerners if necessary. This was vital for successful aid to South Korea and Bosnia.
Encouraging economic liberalization to reduce the impact of corruption and state capture is critical. Further funds should be spent on building modern institutions of the rule of law to fight against corruption and to raise the quality and standards of legislation, which is vital to the success of foreign aid.
One of the key contributing factors to the current energy crisis lies in the institutional power and intransigence of NAFTOGAS and other state-owned enterprises in Ukraine which have prevented Ukrainian energy independence despite significant oil and natural gas reserves. 3,300 state-owned enterprises are still awaiting privatization, and the national economy is awaiting deregulation, which will add a full percentage point to Ukraine’s GDP by most credible estimates.
There is encouraging news. The Ukrainian government is already planning to administer the massive foreign aid together with the EU Secretariat. Prime Minister Denys Shmyhal proposed regionalization of aid, to pair up regional program and regional administrations with countries and provinces from around the world to combat corruption. Plans also exist to help Ukraine build a new, high tech, 21st century economy rather than simply Soviet era factories.
Challenge is also an opportunity. Ukraine can significantly transform its economic structure, abandoning the rust belt economy and making it more compatible with Europe and with the world, which is literally hungry for Ukraine’s agricultural outputs and receptive to its IT products, like the popular software Grammarly.
The least the U.S. and EU could do is ensure we don’t unintentionally undermine reforming incentives inside Ukraine with too much poorly placed aid. Bad examples of American aid abound: South Vietnam, Iraq, and Afghanistan to name a few. Let’s make sure Ukraine joins the examples of effective and thoughtful American aid rather than the money voids of recent years.
Ariel Cohen, Ph.D., is a non-resident Senior Fellow at the Atlantic Council, and director of the Energy, Growth and Security Program at the International Tax and Investment Center. He is the author of “Russian Imperialism: Development and Crisis.”