Ukraine's Economic Potential: Analysis by the Vienna Institute for International Economic Studies
In a new comprehensive study by the Vienna Institute for International Economic Studies (wiiw) and the Bertelsmann Foundation, Ukraine is recognized as having enormous economic potential.
If the necessary institutional and economic policy framework is created, Ukraine has great potential for economic development and global integration. / Picture: © Wikimedia Commons, Jorge Franganillo, CC BY 2.0
The wiiw, a renowned research institute, has played a central role in developing in-depth analyses and well-founded recommendations for Ukraine's economic future. Six key areas were identified that could significantly contribute to the country's economic recovery and development: renewable energies, rare raw materials, metal processing, mechanical engineering, the food industry, and information technology (IT).
Wiiw has conducted a detailed analysis of the IT sector, which has developed as one of the most dynamic economic sectors in Ukraine over the last ten years. In 2021, the IT sector contributed around four percent to the country's total value added and showed solid, export-oriented growth. Before the Russian invasion, the sector employed almost 300,000 people. Another advantage lies in the education system: Ukraine trains significantly more IT graduates each year than its Eastern European neighbors. In 2021, there were 68 IT graduates per 100,000 inhabitants in Ukraine, compared to 23 in Poland, 46 in Hungary, and 54 in Estonia. According to Olga Pindyuk, Ukraine expert at wiiw, Ukraine could realize its full potential and become a major IT power, which could make this sector one of the main pillars of the Ukrainian economy.
In addition to the IT sector, the study, which was largely coordinated by wiiw, also sees great potential in renewable energies and rare raw materials. Ukraine has a large number of resources that could be of key importance for the energy transition in Europe. The European Commission considers Ukraine to be a potential supplier of more than 20 elements from the list of critical raw materials. This offers an opportunity for Ukraine's integration into European value chains and supports the EU's digital and energy transformation, particularly in the automotive and electronics sectors.
Another focus of the wiiw study is on the necessary framework conditions for foreign direct investment (FDI). Attracting foreign direct investment will be crucial for Ukraine's success. Private funds have an important role to play in reconstruction, as they are more flexible and versatile than funds from public and state donors. In addition, foreign direct investment generally brings with it a transfer of technology and greater integration into global value chains. However, to attract FDI on a large scale, institutional reforms in the areas of the rule of law and property rights are necessary. “Military security guarantees from the West and institutional reforms in the areas of rule of law and property rights are the necessary preconditions for large-scale FDI inflows,” emphasizes Pindyuk.
The wiiw has also formulated recommendations for the EU on how it can support Ukraine's reconstruction. The study recommends three main measures to the EU: First, the EU should support Ukraine in overcoming its weakness in attracting foreign direct investment. To do this, the EU must push to improve labor productivity through the full integration of Ukraine into European education, research, development, and industrial policy programs, as well as better institutions in Ukraine. Secondly, the EU should further improve Ukraine's access to the internal market and its integration into EU value chains to achieve greater regulatory alignment with EU standards. Temporary trade facilitations should be made permanent to counteract protectionist reflexes. Thirdly, the study calls for the EU to work closely with Ukraine to develop its industrial policy and align reconstruction with existing economic strengths and promising niches - ideally during the war.
Since its independence, Ukraine has had difficulties attracting significant amounts of foreign direct investment (FDI). With a per capita stock of only around 1,100 euros, Ukraine is one of the countries with the lowest FDI stocks in Europe. To improve this situation, Ukraine has passed several important laws to promote FDI in recent years. In May, the central bank also began to soften foreign exchange restrictions, opening the door to private investors. They are now allowed, within certain limits, to export dividends and pay loans, leases, and rents abroad, which is a great relief for them.
One particularly promising area for foreign direct investment is the IT sector. The IT sector proved to be particularly resilient during the war and is one of the most promising industries for the future worldwide. “Over the past ten years, the IT sector has become one of the most dynamic sectors in Ukraine, with solid export-oriented growth and a share of around four percent of total value added in 2021,” says Pindyuk. She adds that the sector employed almost 300,000 people before the Russian invasion and that Ukraine's education system produces significantly more IT graduates each year than neighboring countries in East-Central Europe.
In summary, the wiiw study shows that Ukraine has great potential to develop economically and integrate into the global market, provided that the necessary institutional and economic policy framework conditions are created. The path to economic recovery and integration into the EU requires comprehensive reforms and strategic investments in key industries. The EU has an important role and responsibility to support the process of reconstruction and modernization of the Ukrainian economy.