Building Back Ukraine Better

In July, the Swiss town of Lugano hosted dozens of high-level officials from around the world at a conference dedicated to the post-war reconstruction of Ukraine. “Recovery is a massive task,” the conference’s website announced, “and poses challenges of a magnitude that cannot be precisely measured at this point.”

Thinking ahead and mobilizing resources for the period after the war is certainly praiseworthy. Future development assistance must not be not squandered or end up in the pockets of the self-seeking oligarchs who dominated Ukraine’s economy before the war.

If Ukraine’s recent successes on the battlefield teach us anything, it would be a mistake to think of the country’s post-war reconstruction as an exercise that can be debated and planned for independently of the war itself. If anything, countries worried about Ukraine’s becoming a bottomless money pit for Western taxpayers down the road must be generous with assistance now, particularly military assistance. One single factor, above everything else, will determine if Ukraine becomes an economic success story or not: Whether or not it can decisively defeat the Russian invader.

Here's a prediction. If Ukrainians do build on the weekend’s victories and restore the country’s full sovereignty, Ukraine’s reconstruction will be quick and easy—far outpacing the imagination of most experts. If they fail and some version of the territorial status quo degenerates through a ceasefire or through attrition into a frozen conflict, no amount of Western assistance, whether financial or technical, will make much of a difference.___STEADY_PAYWALL___

The reason is simple. Post-war reconstructions are primarily about politics, not about finance or technocratic modalities of aid. If post-war politics goes right, all else will fall into place; if it goes wrong, everything else will go down the drain too.

The post-war stories of Japan and Germany illustrate the point. In 1956, Japan’s per capita GDP was higher than in 1940, before the war. By the time that Marshall Plan funding started flowing to Germany and Western Europe in the late 1940s, much of the continent’s infrastructure had already been repaired.

During the occupation period, U.S. financial assistance to Japan, worth $2.2 (a little over $30 billion in today’s dollars) represented several percentage points of Japan’s post-war GDP—comparable in relative size to, say, the EU’s funds flowing to “new” member countries—and primarily took the form of food assistance in the initial years. That assistance was quickly tapered off in the 1950s. The Marshall Plan was even smaller as a proportion of Western European economies—certainly far too small to make a macroeconomic difference.

In both cases, what mattered was the broader political package that the assistance was a part of, which all together facilitated a new social contract that imposed itself through the fact of U.S. victory in the war, and which was conducive to democratic capitalism, albeit with local characteristics. By keeping dirigisme and Soviet-style planning at bay, it set the scene for some of the most extraordinary episodes of economic growth in human history: the “trente glorieuses” in Europe, and Japan’s catch-up growth that brought the economy to par with the leading industrialized nations of the West.

To return to Ukraine: The success of its post-war reconstruction and the amount of aid it might require from Western donors is not a question that can be tackled independently from the outcome of the current war. If the conflict becomes a frozen one, with large parts of Ukraine under Russian occupation, the country will remain vulnerable to Russian destabilization. Presumably, there will be people moving back and forth and businesses that will want to operate both on Ukraine’s occupied territories and in free Ukraine. Those will represent a political challenge for the government in Kyiv—much like similar constituencies do for Moldova and Georgia. The all-but-explicit purpose of setting up such enclaves under Russian control is to provide Russia with a de facto veto over the politics of post-Soviet countries. It is hard to imagine either Moldova or Georgia joining the EU or NATO while such territorial disputes linger on; moreover, the Russia-backed “separatists” can always find ways to thwart the governments’ plans and extract concessions—oftentimes through the use of corruption or threats.

The pro-EU government in Chișinău, for example, continues to tread very lightly around Transnistria not just because of the threat posed by Russia, but also because of the powerful economic interests that benefit from the status quo. Recently, the government renewed a license for Moldova Steel Works, a highly polluting steel mill mostly processing scrap metal in Rîbnița, Transnistria, which accounts for over half of the separatist region’s manufacturing output and which is currently owned by the separatist authorities. To avoid “double taxation,” the company does not pay any taxes into the Moldovan budget.

Abkhazia and South Ossetia may be more insulated from the Georgian economy, but the Kremlin has found other levers over Georgian politics. The founder of the “Georgian Dream” party and the former Prime Minister, Bidzina Ivanishvili, maintains significant business interests in Russia—while also retaining substantial clout in Georgian politics.

The putative “federalization” of Ukraine under the Minsk agreements would have achieved the same outcomes through formal means: The two “people’s republics,” of Luhansk and Donetsk, while under Russian control, would get a seat at the table in Kyiv, including in the Verkhovna Rada. If the infamous deal were to have been implemented, Ukraine could have forgotten about EU and NATO membership—but more importantly, it would have had to scrap enacting reforms to eradicate corruption and strengthen the rule of law.

Yet, as other Russia-sponsored “separatist” regions in Moldova and Georgia illustrate, the existence of a formal framework is not a necessary condition for such regions to become festering wounds on the body politic. Should the ongoing war in Ukraine result in anything other than a complete expulsion of Russia from the territories it occupies, it is almost guaranteed that the resulting dynamics would press against Kyiv’s efforts to get Ukraine’s social contract right.

Imagine, in contrast, if Russian military efforts collapse completely and Ukraine retakes its territory, perhaps except for Crimea. Not only would the Kremlin be dramatically humiliated, but the opportunities for Russian interference into the political life of a victorious, self-confident Ukraine would be drastically reduced.

That does not mean that all of Ukraine’s problems would vanish. Iraq and Afghanistan provide examples of when an overwhelming military victory by the United States did not feed into a straightforward process of reconstruction and reform. The main reason there, arguably, was the lack of a genuine buy-in among the local population and elites—a non-existent problem in Ukraine, where the local population and increasingly also its economic elites have stood united in their embrace of deeper ties to the European Union and to the West.

Getting the Russian military threat—and the Russian economy—out of the picture as much as possible is a necessary condition for progress within Ukraine, including on questions of the independence of its judiciary or domestic crony capitalism, involving Ukrainian oligarchs with ties to the Ukrainian government. One ought not to underestimate the geopolitical ramifications of a disastrous Russian defeat in Ukraine, which could present the West and pro-democracy, pro-market reformers across the post-Soviet space with opportunities similar to the end of the Cold War.

In short, the rate of return on military assistance now exceeds by several orders of magnitude the rate of return Western donors can ever expect to receive on their aid once the war is over. If Ukrainians win this war, they will eventually be able to borrow internationally at tolerable rates, possibly even making future aid superfluous. If the conflict freezes and the Kremlin keeps its tentacles inside of Ukraine, Western money to repair roads, bridges, and hospitals will not change Ukraine’s grim political and economic prospects. It is past time Western governments set their priorities accordingly.

Dalibor Rohac is a senior fellow at the American Enterprise Institute and a contributing editor at The American Purpose. Twitter: @DaliborRohac.