Rebuilding Ukraine: Marshall Plan 2.0?
After World War II, the U.S. mobilized more than $15 billion (equivalent of about 15 billion today) to help finance rebuilding efforts throughout the European continent. The Marshall Plan transformed the post-war landscape and European economies. Could Ukraine benefit from a Marshall Plan 2.0?
1. Damage and Estimated Fund
Since Russia's invasion of Ukraine on February 24, 2022, nearly 12.8 million people have been displaced in Ukraine. As of May 10, the infrastructure damages in Ukraine are estimated at over USD 94 billion. Kyiv School of Economics (KSE) reported that at least 208 factories and enterprises, 508 healthcare institutions, 562 kindergartens, 156 warehouses, 992 educational institutions, 295 bridges and bridge crossings, 102 religious buildings, 83 administrative buildings, 27 oil depots, and 12 civilian airports have been damaged, destroyed or seized. According to the International Monetary Fund, Ukraine's GDP will be reduced by 10 percent. The ongoing conflict triggered mass migration (more than 7.3 million Ukrainians were forced to leave with another 7.1 million internally displaced) as well as investment outflows, causing a more pronounced output contraction. Taking indirect losses such as GDP decline, investment cessation, labor emigration, and social support into consideration, the Ministry of Economy and KSE estimated that the economic losses of Ukraine are between USD 564 billion and USD 600 billion.
On July 4, 2022, Denys Shmyhal, the prime minister of Ukraine, announced that the Ukraine government had developed a digital map of Ukraine to record damages in this war and estimated that the "full-fledged Ukraine recovery plan" is at USD 750 billion. This recovery plan is reminiscent of post-World War II Europe and seems like the Marshall Plan for Ukraine. The Marshall Plan, officially the European Recovery Program, was initiated by the United States in 1948, aiming to provide foreign aid for Western Europe, including helping rebuild places long devastated, modernizing industry, and removing trade barriers to improve Europe's economy. The Marshall Plan fund provided for Europe was nearly 5% of the United States' 1948 GDP, which couldn't be the number on the cost of Ukraine's reconstruction since there remains uncertainty about the duration of the war and the results of the war.
The success of Ukraine's recovery will serve as a deterrent to other authoritarian regimes; different results of this war will influence the sources of reconstruction funds. Brain Cavanaugh, a senior vice president at American Global Strategies, suggested four potential scenarios for Ukraine:
A complete Western victory scenario
Creating a new internationally recognized country by Russia in the east of the Dnieper River
Maintaining the current frozen conflict scenario
A complete Russian victory
It is possible that due to the scenarios in Ukraine, some countries would not provide funds for rebuilding Ukraine like the situation in Syria discussed in last week's TBG blog.
Regardless of the potential scenario, rebuilding Ukraine still needs massive funds. From January to July 2022, Ukraine received military, financial, and humanitarian aid from 40 countries, specifically the EU, the G7, Australia, China, Norway, South Korea, Switzerland, and India. Among these countries, the United States has provided EUR 42.6 billion of aid (including EUR 23.8 billion of direct military aid) even if there is nothing for rebuilding this country.
Figure 1
Government support to Ukraine from January 24 to July 1: Type of assistance, Top Seven Countries/Institutions, € billion
Source: Antezza et al. (2022) “The Ukraine Support Tracker” Kiel WP. https://www.ifw-kiel.de/topics/war-against-ukraine/ukraine-support-tracker/
International organizations and investors are also playing critical roles in funding Ukraine's reconstruction. Joseph Borrell, the European Union's foreign policy chief, suggests utilizing frozen reserves from Russia's Central Bank to fund such cause. The seized assets of Russian oligarchs and the more than USD 350 billion can help to fund Ukraine's reconstruction and make Russia pay for a portion of rebuilding costs. For example, the EU reported more than USD 30 billion in frozen Russian assets, including USD 7 billion worth of boats, helicopters, real estate, and artwork. Also, a USD 90 million yacht owned by Viktor Vekseberg - a Russian oligarch - has been seized. In addition, according to the White House, there are millions of dollars in assets held by Russian elites in U.S. bank accounts.
There are legal challenges to using Russia's frozen assets since these assets are under international law protection. In general, it is still uncertain when and how much funds will be provided to Ukraine to rebuild the country.
2. Ukraine's Marshall Plan?
The impact of the Marshall Plan on Europe's economy is broad and pervasive. For example, the industrial production for countries involved in this plan since 1951 was 35% above their 1938 level, which exceeded the program's goal (i.e., 30%) and was 55% higher than in 1947. The average GNP increased by about 33% from 1947 to 1951. Besides the benefits of the Marshall Plan, it also includes trade liberalization, economic integration, psychological boost, etc. Is a Marshall Plan right for Ukraine? Ukraine is a fundamentally different situation and there are also several challenges to implementing Marshall Plan 2.0 in Ukraine.
First, the Marshall plan fund - 90% grants and just 10% loans - is not practicable and might not be used to reconstruct Ukraine. It's unfair for taxpayers to pay all the cost of another country's reconstruction. In addition, according to Transparency International's Corruption Perceptions Index, Ukraine ranked 122nd out of 180 countries in 2021, which is the second most corrupt in Europe; and its opaque governance is a matter of concern to countries providing funds. Ukraine's general performance as a recipient has disappointed international organizations like IMF that discontinued a second disbursement planned for Ukraine in September 2020 since Ukraine did not carry out the necessary prior actions. Therefore, increasing transparency is essential, which should be one of the prerequisites of adopting another Marshall Plan in Ukraine. In addition, the example of Poland - which obtained limited Western grants to achieve economic development after the fall of the communist government of Poland in 1989 - indicates the possibility of using restricted grants for rebuilding efforts. On the other hand, limited grants also mean that Ukraine's debt will increase. However, its debt is already close to 70% of its GDP and would hinder the economic recovery after the war, which economic reforms and debt relief may mitigate.
Second, rebuilding the education system is also essential for Ukraine's recovery. Helmut Schmidt, former German Federal Chancellor, noted that "a well-educated workforce and technical know-how" were the prerequisites for the success of the Marshall Plan in Europe. However, even before the conflict, Ukraine's education system had shrunk. According to UNESCO statistics, the net enrolment rate by level of education dropped from 0.61 in 2015 to 0.41 in 2020. The number of tertiary students declined from 2.85 million in 2008 to 1.67 million in 2017. While hundreds of higher education institutions also decreased by more than 41% from 2008 to 2017. In addition, as of July 11, 1900, schools and universities have been damaged; and 216 institutions have been destroyed, according to Ukraine's Education Ministry. Education is fundamental for economic recovery and for implementing the Marshall Plan, such as the technical assistance program aiming to increase industrial productivity and requiring a well-educated labor force.
In addition, Virginijus Sinkevicius, the EU Commissioner for the Environment, argued that plans to rebuild Ukraine should include an environmental component and warned that the environmental cost of this war was increasing. The Marshall Plan for Ukraine also needs to make an environmental recovery strategy, leading to a sustainable recovery in Ukraine.
The Marshall Plan is a model for large-scale rebuilding; however, it cannot be fully effective unless it accounts for the unique challenges of Ukraine's current situation.
References:
Brussels proposes plan to confiscate frozen Russian assets to help rebuild Ukraine. https://www.euronews.com/my-europe/2022/05/25/brussels-proposes-plan-to-confiscate-frozen-russian-assets-to-help-rebuild-ukraine
The Reconstruction of Ukraine: Three Experts Offer Priorities for the Future. https://www.wilsoncenter.org/blog-post/reconstruction-ukraine-three-experts-offer-priorities-future
Lessons from the Marshall Plan. https://web.worldbank.org/archive/website01306/web/marshall_plan.html#:~:text=Abstract,of%20Europe%20under%20the%20plan.
Is a Marshall Plan right for Ukraine? https://thehill.com/opinion/international/3513962-is-a-marshall-plan-right-for-ukraine/
How should a Marshall plan for Ukraine work? https://www.theguardian.com/business/2022/may/12/marshall-plan-for-ukraine-russian-invasion
A Marshall Plan for wartime destruction in Ukraine? https://www.nationalww2museum.org/war/articles/marshall-plan-wartime-destruction-ukraine
Poland - A Soviet State turned NATO ally. https://www.thelugarcenter.org/assets/htmldocuments/Poland%20brief%206.21.19.pdf
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