Ukraine is threatened with economic collapse: Four measures could save the economy

Created: 08/14/2022 15:06

By: Astrid Theil

According to experts, President Volodymyr Zelenskyy and his government are currently steering Ukraine into economic bankruptcy.

© Ukrainian Presidential Press Office / dpa

According to the estimates of well-known economists, Ukraine is facing an economic collapse and associated defeat in the war.

A study therefore proposes four countermeasures.

London/Kyiv - A study from Great Britain sees a massive threat to the stability of the Ukrainian economy.

The "Centre for Economic Policy Research" in London warns in its study that Ukraine urgently needs to "recalibrate its macroeconomic strategy".

According to the assessment of renowned economists, Ukraine has been so weakened by the war, which has been going on for almost seven months, that it may soon no longer be able to raise the funds for its national defense.

Ukraine is threatened with economic collapse and with it defeat in the war

The study entitled “Macroeconomic Policy for a Wartime Ukraine” was prepared by well-known economists: Torbjörn Becker, Barry Eichengreen, Yuriy Gorodnichenko, Sergei Guriev, Simon Johnson, Tymofiy Mylovanov, Maurice Obstfeld, Kenneth Rogoff and Beatrice Weder de Mauro .

The conclusion of the analysis is clear: if there is no change in the Ukrainian economic system, the consequence will be a crisis that will make Ukraine's ability to sustain the war effort impossible for a long time.

If the economic situation in Ukraine does not improve, it will lose the war with Russia.

The Ukrainian economy is suffering massively from the war: four measures should help

As a result of the war, Ukraine has suffered a massive loss of economic output: the economically important steel production and the large oil refineries in the country have been destroyed by Russian missiles and the Ukrainian ports are being blocked*.

Large industrial construction projects have also been halted as a result of the war, putting an additional burden on the Ukrainian economy.

The labor market is also suffering from the war: according to estimates by the National Bank of Ukraine, more than a million workers have been made redundant.

More than half of the companies have also reduced wages by up to 50 percent.

In June 2022, the unemployment rate in Ukraine was 35 percent.

In the current situation, the Ukrainian government must mobilize more resources in order to be able to continue to pay for the high military expenditures and to help the population affected by the war.

The authors of the study outline some concrete measures that could help stabilize the economy in Ukraine.

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Crisis of the Ukrainian economy: raise taxes

The first proposal of the study aims to increase taxes.

Tax increases are recommended that are easy to administer and contribute to social justice: luxury goods should be taxed more heavily and people with high incomes should pay more taxes.

The government should “make taxes more progressive so that the burden of war falls more on those with more resources.

This is desirable for reasons of both justice and social solidarity,” the study says.

In Ukraine, there is currently a flat income tax rate of 18 percent.

In addition, exemptions from the tax would have to be examined more closely.

Prevent Ukrainian economy from collapsing: cut public spending

The second proposal involves a massive reduction in spending.

When it comes to spending, “prudence and restraint should be the guiding principle” for the government.

For example, the regular maintenance of roads, bridges and other infrastructure should be paused until the end of the war.

The expenditure for refugees and internally displaced persons* should also be restructured.

A form of basic income is currently being paid to those affected.

"While this approach was appropriate in the first chaotic days of the war, the cost of basic income is high," they argue.

A distinction should be made between vulnerable and relatively wealthy refugees.

In the future, for example, the basic income could be linked to looking for work and doing community work.

Finally, expenses could be saved by transferring costs for some areas to external partners.

For example, basic medical care, normally covered by the public sector, could be provided by Doctors Without Borders, while the United Nations and the Red Cross provide and pay for medical supplies.

The costs for museums and galleries could also be covered by international organizations.

Close cooperation between Ukraine and its allies in the west is important for this.

Inflation threatens: print less money and liberalize the economy

A third measure proposed is a reduction in the money supply and market liberalization.

Ukraine is currently printing a lot of money to continue financing military spending.

However, the risk of high inflation being triggered is too great.

Rather, the economy should be severely deregulated, for example by removing bureaucratic hurdles.

“There is currently little to no economic activity in some sectors and areas of Ukraine as a result of the Russian invasion.

The freed-up resources must be used elsewhere, and government policies should facilitate this redistribution of resources on a large scale,” they explain.

So far, companies have been motivated to relocate their businesses to western Ukraine, which has been less war-torn.

However, only a few companies followed this call.

According to the experts, a radical liberalization of the markets could change this dynamic.

In this context, the study also proposes the appointment of an official to be responsible for deregulation.

Russian assets in Ukraine: appoint administrators

Finally, the London study recommends using managers for Russian assets in Ukraine.

Since the outbreak of war, the Ukrainian government has confiscated assets from companies and individuals who worked for the Russian side.

"The liquidation of these assets is likely to take some time and will generate limited revenue at the moment," the authors write.

Therefore, it makes more sense to appoint administrators of these assets who could, for example, continue the business of a company.