Polish Lessons for the Ukrainian Economy

What a difference a few decades can make. Not long ago, Ukraine and Poland weren’t all that different in their economic performance. When the Soviet Union collapsed in 1991, Ukraine was only lagging slightly behind Poland in term of average income.

It had a better industrial base and far less foreign debt than Poland. Ukraine is also much more richly endowed in terms of mineral deposits, climate and soil than its neighbor. Yet, a quarter century later, the gap between both countries has become enormous.

While Poland has created remarkable growth and prosperity in the intervening decades, production in Ukraine has dropped by a third. As a result, Ukraine’s per capita GDP now is only a third of what it is in neighboring Poland. The war in Eastern Ukraine is doing enormous damage to the economy.

Understanding the disparity

What did Poland do better? How can Poland’s remarkable success be transferred to Ukraine? What role should Europe play?

Those are key questions that need to be addressed if Ukraine is to gain a better and more stable future. Poland’s success wasn’t due to any kind of magic trick.

The vast difference that has emerged by now boils down to one straightforward reason: Poland, after 1990, managed to implement fundamental legal and constitutional reforms which created the conditions for a competitive and dynamic market economy.

In contrast, Ukraine’s state was captured by oligarchs’ interests from early on. Under the control of the oligarchs, successive Ukrainian governments failed to institute a reform of the economy as well as of the state at large. Even the latest elections haven’t really brought about comprehensive change.

Anti-oligarch reform is one area where European involvement in Ukraine could be very beneficial. Since the Maidan revolution in 2014, Ukraine has received six billion euros in grants and financial aid from the EU. It desperately needs more funds in order to keep afloat.

This gives the Europeans an enormous amount of leverage that should be used to push for progress on the legal system, severing the ties between business and politics, taxing oligarchic fortunes and confiscating illegally amassed wealth.

Save energy, save the economy

Both the Vienna Institute and Johannes Hahn, the European Commissioner in charge of European Neighborhood Policy, put forward another crucial area of reform in Ukraine: energy saving. If Ukraine could achieve a level of energy efficiency comparable to the EU average, the country would be self-sufficient in gas.

Just imagine: Ukraine would not need gas imports from Russia anymore – what a game changer that would be! More energy efficiency would also greatly help the competitiveness of Ukraine’s industry. Right now, every unit of GDP produced in Ukraine requires three times as much energy as it does in the West.

To return Ukraine’s economy to growth, the deep structural split between the east and the west of the country needs to be taken into account. Ukraine’s industrial base lies in the east and is highly dependent on exports to Russia and other post-Soviet countries. The west traditionally is more agrarian and also much poorer.

What this means is that every effort needs to be made to improve economic structures in western Ukraine. Measures to be taken include fostering trade with the EU, facilitating foreign direct investment as well as cross border production linkages with the central European economies.

A long road ahead

None of this will be easy. For Ukraine’s economic misery, no quick fixes exist. Enormous political will is going to be needed – both for Ukraine’s friends and creditors, who must push the country in the right direction, and for the Ukrainians themselves.

Much of Poland’s political and economic success can only be explained through the Polish people’s determination to decide their own future. Today, Ukraine faces a similar situation.

It is the Ukrainians themselves who need to muster the political will to institute the reforms for a better future that will bring them closer to Europe. The European Union will be their trustful and constructive partner.