A view of the destroyed regional administration building in Mykolaiv, Ukraine. (Source: Edgar Su/Reuters)

Rebuilding Postwar Ukraine Must Start Now. Here’s How

Therese Raphael

11:15 AM IST, 10 Jun 202211:15 AM IST, 10 Jun 202211:15 AM IST, 10 Jun 202211:15 AM IST, 10 Jun 2022

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(Bloomberg Opinion) -- When war is raging in Ukraine, talk of reconstruction may seem premature. How can the country rebuild anything given the constant threat of attack?

And yet, it’s right that governments and multilateral fora, along with Ukraine itself, are focusing on rebuilding.

Although the first principle of help for Ukraine has to be military aid along with humanitarian support, it is not too early to plan some aspects of reconstructing the country. The emphasis here should be on planning. Although there is some emergency restoration work and other support needed now, the big disbursements will largely come later and will require Ukraine itself to pursue certain reforms. But setting up the structures and pathways is essential. It should also be led by Europe, not least because a dysfunctional or unstable Ukraine would have profound political, economic and security consequences for the continent.

It’s clear that degrading Ukraine’s economy is part of Russia’s plan, as rocket attacks on the huge grain silo of Mykolaiv and the theft of grain stocks demonstrate. Vladimir Putin has also refused humanitarian corridors, blocked grain exports and attacked factories, plants and social infrastructure, along with roads, ports and railways.

Ukraine’s gross domestic product is expected to contract by 45% this year, and 99% of companies in the country have reported losses. Roads, railways, grain elevators, telecommunications networks, real estate, schools and hospitals have been damaged, destroyed or seized by Russian forces. Maritime transport has been shut down. Millions have fled the country; millions more are internally displaced. A running tally by the Kyiv School of Economics puts key infrastructure loss at $105 billion.

And that will only be a small part of the total bill. The U.S. spent 5% of Europe’s GDP over a period of four years on the Marshall Plan after World War II — around $179 billion in today’s money. Amounts five, six or 10 times that are being bandied about for the rebuilding of Ukraine. Some quarters are pushing to put frozen Russian assets to use for the purpose, though the legal basis for doing so is dubious.

There is a large body of economic research on post-conflict reconstruction, with case studies ranging from Iraq to Afghanistan, Sri Lanka, Haiti and others, and the upshot is that these efforts often flop.

That doesn’t have to be the case in Ukraine. It may be Europe’s poorest economy, but at least it doesn’t have the kind of baggage of countries trying to rebuild due to internal conflict. Its greatest strength is its democracy and civil society, and the war has magnified the importance of both.

Volodymyr Zelenskiy’s government also has received high marks since the start of the war for both competence and vision — and anyone who has followed Ukraine’s bumpy post-Soviet trajectory will know just how unusual that is. From the first day of Russia’s attack, it moved to safeguard financial stability and simplify taxation, making it easier for those displaced to access services.

Still, there is no textbook for this, as European Bank for Reconstruction and Development Managing Director Matteo Patrone acknowledged in a Zoom call. How much money should be allocated to which rebuilding priorities? How much should be in the form of grants and how much loans? Who should oversee the disbursements, with what timing and what conditions? Should frozen Russian assets be repurposed for reconstruction?

There are different stages to any reconstruction project of this scale, but Patrone notes an immediate need to make repairs to vital infrastructure to enable exports to flow again, particularly those crucial to food security. Restoring some rail, roads and inland waterways will also help reestablish some normality in parts of the country.

To attract serious investment again, investors will obviously need to feel safe from Russian artillery attacks. But Ukraine’s government must also prepare the way with a range of institutional reforms. The agenda looks similar to what foreign donors, the European Union and EBRD wanted before the war, including judicial reform, corporate governance reform and privatizations in banking and other areas of the economy where the state remains dominant.

Patrone says the Ukrainian officials he works with are wise to the challenge and know that, with so much public support, now is the time to tackle the really difficult reforms.

But change won’t be easy, and not just because Ukraine is fighting; it also has to kick old habits and structures. The country came 122 out of 180 on Transparency International’s corruption perceptions index in 2021, with 23% of public-service users saying they paid a bribe in the previous 12 months.

To be fair, the government has been trying harder. There is a round-the-clock hotline so that citizens can address corruption issues and an electronic register that allows the public to inspect the assets of public officials and civil servants. Innovations such as the open-source e-procurement system ProZorro (a play on the Ukrainian word for transparently, ) put the UK’s to shame.

Still, Ukraine has a very long way to go. Talks about EU membership may be motivating, but they’re likely to be slow and contentious. The country will have to press on with reforms even without that carrot.

The big prize, if Ukraine can get it, is the third word in the “build back better” slogan. Ukraine wants its reconstruction program to be a catalyst for greener, more sustainable growth. Given the country’s educated workforce and strength in IT, that’s not unrealistic. Diversifying away from fossil fuels is also a security imperative, though one that will take time. Ukraine’s supply of nuclear energy, which already accounts for 50% of the energy needs of the country, must be modernized and more renewable energy sources built.

The Marshall Plan was generous, but its genius was in creating the right environment for recovery and investment. It was also targeted, separating humanitarian aid from reconstruction support, and came with strict conditionality. The design of any reconstruction plan will have to be heavy with conditionality as well and encourage further political and institutional reforms.

How funds are administered may be secondary to what Ukraine does with them, but the vehicle matters, too. The authors of a blueprint for Ukraine’s reconstruction, published by the Center for Economic Policy Research, proposed having an EU-authorized independent agency, similar to the Economic Cooperation Administration that administered the Marshall Plan. The European Commission’s proposed RebuildUkraine Facility — to be led jointly by Ukraine and the European Commission, and to coordinate aid from EU member states, international financial institutions and multilateral groups such as the G7 — seems to fit that bill, though it’s doubtful it will be free from political interference.

But Europe’s big talk on rebuilding belies the reality that successful reconstruction can’t take place in the absence of security. For all the focus on money, US security guarantees were the critical complement to the postwar aid program, as Benn Steil, author of a book on the Marshall Plan, has argued. Ukraine is not likely to have that luxury, at least not for a very long while. It will have to spend a large share of its own budget on security.

Rebuilding Ukraine will be slow, expensive and fraught with risks. But the alternative is unthinkable. And the longer the war drags on, the higher the costs will be. While it’s important to prepare for reconstruction, the biggest downpayment the democratic world can make to Ukraine’s future stability is investing in the country’s defense now.

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