Time for Ukraine to Rethink Industrial Policy

Ukraines vulnerability towards Russian aggression also stems from the fact that it entered the war with an economy compromised by three decades of deindustrialization. It could only provide a fraction of the arms and tax revenues needed for the country’s defense. This forced Ukraine into a dangerous reliance on external support from Western democracies and on unsustainable levels of foreign debt accumulation.

This thesis underlies the study "Industrial Policy for Ukraine’s Survival: Reversing 30 Years of Deindustrialization" (2024) by Brian Milakovsky (USA) and Volodymyr Vlasiuk (Ukraine). The authors study the attempts of Ukraine over the past decades to revive the economic potential and also argue why, in the conditions of an ongoing full-scale war and post-war reconstruction, the revival of industry becomes task No. 1 for the state.

According to this study, Ukraine is in a profoundly dangerous position today, with Russia applying “military Keynesianism” to its much larger economy and spending more than 7% of its GDP on the military while Western assistance to Kyiv becomes increasingly unreliable. Ukraine needs crash re-industrialization, and for that it needs to throw off neoliberal dogma that has kept industrial policy out of the economic toolbox for nearly two decades. Kyiv should recognize that the state must play an active role in addressing war-induced market failures.

Of interest is the block of practical recommendations prepared by the researchers, which are addressed to the Ukrainian authorities, the European Union and other stakeholders. Brussels needs to loosen the constraints of its free trade agreements with Ukraine to allow Ukraine to practice localization and targeted assistance to war-devastated industries.

“As Ukraine accumulates more and more debt to fund its defense and reconstruction, all its partners must recognize the imperative to spend as much of that loaned money as possible on Ukraine’s own industrial goods, rather than view the funds as a source for stimulus in their own economies. Only in that way can Ukraine restart the virtuous circle of production and taxation that will allow it to gradually restore self sufficiency and pay down its debts”, the authors claim.